Growing Beyond

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Growing Beyond

How high performers are competing for growth in difficult times

Growing Beyond

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In this report

Executive summary 2

The new economy 4

Customer reach: targeting and satisfying customer needs 10 Operational agility: from supply chain to integrated value chain 18 Cost competitiveness: from complexity to confidence 24 Stakeholder confidence: telling the right story, the right way, at the right time 30

Conclusion 36

About this report 38

See also the four Growing Beyond reports that explore these subjects in greater detail.

The benchmark findings for this report are drawn from two studies undertaken in September 2011. The first, conducted by the Economist Intelligence Unit, surveyed senior executives from 600 companies worldwide. The second involved a more detailed investigation of 300 Ernst & Young clients, undertaken by means of interviews with Ernst & Young partners globally.

As with our earlier studies, we have factored out the impact of sector and

distinguished between the top third performers and the lowest third performers — in both revenue and Earnings Before Interest, Taxes, Depreciation and Amortization (EBITDA) growth — to see if we can identify specific patterns of action that might explain the superior performance.

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Since the credit crunch and the ensuing “great recession” of 2007–09, companies worldwide have been battling to survive, sustain and grow in what have continued to be highly adverse economic conditions. For many in management, this has been a completely new experience. The “win/win” years of a global boom have come to an abrupt stop. Most of the assumptions of the previous decades, particularly the “borrow to buy” approach, have proven to be false friends.

Like most organizations, Ernst & Young’s clients have inevitably not been immune.

In order to help them navigate the huge change and challenges they have

encountered, we have invested in identifying and creating practical insights to give them a strong basis on which to plot the right way forward.

In 2008, we launched a major program of research to understand the challenges that companies were facing and to seek to identify any lessons or best practices that could serve as a guide. The resultant report showed how high performers were reacting to the first wave of the credit crunch in seeking out “Opportunities in adversity”. In 2009, we built on this with a study that analyzed the “Lessons from change”, again focusing on the actions of the high performers. In early 2011, a further study explored how the high performers were “Competing for growth”

by adopting new strategies for new markets and new products, and taking new approaches to managing the talent that is essential to achieving their goals.

One year on and we have taken a similar approach with this Growing Beyond study, examining how high performers have moved forward to identify lessons that may provide insight and help for others. But is our model still valid? Is sustainable growth still possible?

If a rising tide floats all boats, a falling tide reveals those who have mastered navigation.

How high performers are growing beyond

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2 Growing Beyond How high performers are competing for growth in difficult times

The clear distinction

Executive summary

High performers take charge of their own destiny. They have a laser-sharp focus on executing against the four drivers of competitive success — customer reach, operational agility, cost competitiveness and stakeholder confidence. And they strike the right balance in their approach to each of these four drivers in relation to the others — strategically and tactically. These are the key findings of the Ernst & Young Growing Beyond report.

Customer reach

Operational agility

Stakeholder conﬁdence

competitivenessCost Focus on

key segments

Create ﬂexible work/delivery platforms

Accelerate speed of response

Improve

collaboration Optimize

capital Master

innovation

Sustain cost reduction Inform

pricing process

Pass on cost pressure Prioritize

markets Reinforce

brand Broaden product/

service offer

Identify and

explain risks Re-engage with

internal talent Anticipate regulatory compliance Enhance

reporting

High performers

seek ...

Furthermore, the approach that high performers have taken to the four key drivers has been highly distinctive. They have been more successful than others in identifying and responding to opportunities to maximize their potential market. They have been optimizing their ability to respond to these opportunities.

They have been striking the right balance between price and cost to sustain growth. And they have been building the support they need from their stakeholders to enable them to respond to opportunities.

High-performing companies are taking distinctive action. The way that they have been pursuing the four key growth drivers has caused them to grow beyond their traditional markets.

High performers have an active but focused approach to market expansion, including:

•

Approaching their markets through a deep understanding of their target customers

•

Going beyond the figures to develop a deeper understanding of the real nature of the new market and their target segment — and innovating their products and processes accordingly

•

Being flexible in their approach to market entry, but with a focus on speed of activation and integration into wider operations

•

Moving pricing, production and decision-making as close to target markets as possible

•

Paying greater attention to how they fill technical and operational roles in their new operations

•

Communicating more openly and frequently about their new market strategy with stakeholders

•

Although India and China stand out as targets, clear regional approaches emerge with regard to cross-border opportunities and the next generation of rapid-growth opportunities (there is no new global “BRIC”).

High performers are ahead in respect to:

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High performers use incremental innovation to capture the wallet of current customers, in terms of share and price premium

•

They seek to get further up the value curve and secure better prices for their efforts, both through capturing more value in product design and through increased marketing to establish and protect a brand premium

•

Increasing product ranges significantly — some 30% have increased their product range by more than 20% in the past two years

•

Focusing on current customers and employees as primary sources of innovation — approaching innovation closer to the target market and, increasingly, in rapid-growth

markets themselves

•

Following a more formal innovation process, but with greater clarity on “go/no go” criteria and with launch and review built into the development process

•

Achieving competitive advantage by having business management oversee the innovation process

•

They take their stakeholders with them by sharing more detail on the potential of their innovations and the progress they are making with them

High performers have been approaching their talent with the same focus that they approach the market

•

Being more involved with employee engagement

•

Handling the challenges of the recession with more imagination, by having an open commercial dialogue with their staff to address effectiveness and efficiency issues

•

Going outside the organization and traditional talent pools for both management and technical skills to get the diversity required for complex decision-making

•

Building the right local team to activate new operations quickly — recruiting local marketing and management, but also paying greater attention to technical and operational roles

•

Being more selective in recruitment of talent, but faster to both develop and deploy. Resource is moved into new markets, but with an explicit knowledge transition expected

•

Engaging in a battle for talent — experiencing higher staff turnover as a consequence despite being willing and able to pay for talent (although recognizing that this is only part of the employment equation)

•

Twice as likely to have people from emerging markets in Global management positions

All of this has been achieved by high performers within an environment of uncertainty and competitive intensity rarely seen before. Intense price pressure from a widely overleveraged market has combined with growing costs for key inputs and broader inflation. Economic performance has diverged greatly among geographical markets — globally and within region.

Stakeholders — both internal and external — have questioned companies’ actions with ever-increasing intensity.

In the challenging economy in which we all now operate, all companies could benefit from examining how their performance compares in the four key areas where high performers are adopting differential strategies to secure their growth. The following pages of this report — and the four accompanying detailed reports on the four key drivers — are intended to provide a foundation from which to start.

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44 Growing Beyond How high performers are competing for growth in difficult times Growing BeyondHow high performers are competing for growth in difficult times

The past six months have not evolved as predicted: the recovery has not continued and strengthened. A private sector problem — initially focused in financial services — has spread across the wider economy and become a sovereign debt crisis that challenges the politicians and the institutions of Europe, the US and, indeed, many of the international bodies. The Eurozone’s very survival is under strain. The US may never retain the universal AAA status on its debt that has underpinned the global economy for the past 60 years.

Even the rapid-growth markets are not immune to the effects of a weakened global economy: their growth is slowing as the developed world faces a possible second recession, which may yet occur despite all the traditional remedies having been administered.

The new economy

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Four factors stand out for businesses as characterizing the post- crisis economy: market variation, increased volatility, growing cost pressure and stakeholder nervousness.

1. Market variation has led to a two-speed world

The markets that a company operates in will have a profound impact on its ability to grow. While it is possible to be successful in a shrinking economy, it is easier to achieve that success when the economy is growing.

The world now operates at two speeds: the grindingly slow pace of growth in a large amount of the developed world and the rapid growth of certain emerging markets. The rapid-growth markets have grown on average 5.4% over the past decade and, according to Ernst & Young’s Rapid-Growth Markets Forecast, they are predicted to outpace more mature markets by an average of 3.5% over the next. In an interdependent world it is inevitable to their markets will be impacted by the slowdown in the developed world. However, the relative performance of these economies is likely to remain strong, driven by:

•

continued industrialization

•

improved economic management and political stability

•

strong population growth, particularly the emergence of a middle class.

By 2020, they will account for 50% of global GDP, 38% of consumer spend and 55% of capital investment.

Even within Europe, the divergence between national economic performances has grown, with strong performances from countries such as Germany, The Netherlands and Sweden, but much weaker performance in countries such as the UK, Portugal, Ireland and Greece.

Growing market variation in GDP growth

Shown: GDP growth in percent. Base year 2009.

Source: Oxford Economics.

2009 2010 2011 2012 2013

US Eurozone Brazil China India

Russia Rapid-growth markets World

100 105 110 115 120 125 130 135

140 Forecast

In our 2011 Competing for growth survey of 1,200 leading companies, 79% reported that their markets are increasingly globalized: this reflects not only global demand, but also the opportunity for global operations. The resulting interdependence between regions means that companies can no longer operate in isolation. For example, there are few major manufacturers today that do not source commodities or raw materials from Africa or China, or supply finished goods to these and other rapid-growth markets.

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The new economy

2. Market volatility is a constant

Every day sees more data published on market conditions and while some offer a glimpse of a more positive outlook, taken as a whole, the general direction seems downward. Yet until late July, market data and coverage seemed to suggest we were over the worst.

One trusted measure of instability is the VIX Index, which forecasts market expectation of stock market volatility over the following 30 days. Until mid 2007, this had averaged around 10 (1 being low, 100 being high): at the peak of the financial crisis, the VIX reached 80. This peak subsided as the markets calmed down and has averaged 20 during much of the last two years.

However, recent shocks around the solvency of certain Eurozone states, budgetary challenges in the US and falling growth in the much-heralded BRIC countries (Brazil, Russia, India and China) have destabilized this trend. Over the last two months, volatility measured on the VIX has more than doubled to over 40.

While volatility may fall back from it's current high level, it is unlikely to return to pre-crisis stability. The growing interdependence of the Global economy introduces inherent complexity and volatility.

3. Cost pressure: being squeezed from both sides

In an economic environment characterized by strong growth, cost pressures are both expected and manageable. But when growth is weak or absent, challenges abound. Markets globally are experiencing significant inflation frequently generated in the face of poor GDP growth. In the UK, for example, inflation of around 5% contrasts starkly with growth of scarcely 1%.

Even in rapid-growth markets such as India and China, inflation has been creeping up — sometimes above GDP. Drivers of this trend include increased demand for commodities, leading to shortages in vital foodstuffs like rice. But it also reflects domestic inflationary pressure, as capacity utilization rates rise to above normal levels and strong demand for labor puts upward pressure on wages. Interest rates have often been increased in consequence, also adding to the costs for business.

Volatility index (VIX)

Shown: Daily prices in % from 30 October 2006 to 27 October 2011.

Source: Factiva/Down Jones.

0 10 20 30 40 50 60 70 80 90

30 Oct 06 30 Jan 07

30 Apr 07 31 Jul 07

31 Oct 07 31 Jan 08

30 Apr 08 31 Jul 08

31 Oct 08 31 Jan 09

30 Apr 09 31 Jul 09

31 Oct 09 31 Jan 10

30 Apr 10 31 Jul 10

31 Oct 10 31 Jan 11

30 Apr 11 31 Jul 11

Unit wage costs

Shown: Unit wage cost development in %. Base year (100%) 2000.

Source : Oxford Economics.

50 60 70 80 90 100 110 120 130 140 150

2000 2002 2004 2006 2008 2010 2012 2014

Unit wage costs 2010=100

Malaysia

India China

US Germany Forecast

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Corporate cash balances

Shown: 1,000 largest listed companies globally by market cap, total cash held over five years.

Source: OneSource.

100,000 200,000 300,000 400,000 500,000 600,000 700,000 800,000 900,000

2007 2008 2009 2010 2011

Corporate cash balances

In US$ m

It is widely felt that these cost rises cannot easily be passed on.

Consumers, often already over-leveraged, are facing tougher constraints in gaining more credit and, unsettled by their economic prospects, are tightening their belts. The effect is being felt through every part of the supply chain. In fact, 60% of respondents to our survey expect price rises to be at, or below, the inflation rate in the near term.

4. Stakeholders are holding back from commitment Credit ratings agencies have reacted to the recent return of volatility with a string of downgrades. While the countries hitting the headlines have been sovereign states — ranging from the US (down to AA) to Italy (down to A) — many corporates have also received attention on an individual level. Equity markets clearly display this trend in aggregate — for example, the Dow Jones index is down 20% this year (2011) and has been, at times, only 20% below that of 2007.

But even though not all businesses have suffered from

downgrades and depressed stock prices, stakeholders are rightly nervous about committing to spend on an unknown future. Some major corporates are sitting on mountains of cash, holding back from taking bold strategic moves, but not sure whether to return the cash to shareholders. Looking at the largest listed companies globally, we see that cash on balance s has increased from US$465b to US$803b over the past five years — a 76% increase.

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The new economy

Competitive intensity increases

Each of these four factors is significant but their real impact comes from the fact that they are interconnected. The response to a variation in market performance might well be to rebalance the business by entering faster growing markets but this is likely to have significant cost implications. The long term potential of rapid growth markets is clear, the potential for short term profit is much less so. And achieving that positive outcome is dependent on clear plans being effectively executed — a task made more complex when volatility generates increased uncertainty.

Stakeholders is a broad term incorporating investors, business partners, regulators and employees. Restoring their confidence would be challenging without the potential negative implications that foreign investment, uncertainty and endless cost-cutting can imply.

The impact of these factors is to create greater competitive intensity and to make the business environment more difficult.

Some 51% of respondents report that they are focused on the very survival of their business. This focus remains high even with high performing companies. Many others are engaged with restructuring their business to meet new conditions. Business failure is a real and growing threat.

A growing number of companies are learning to cope These four characteristics mark the "new economy" as different from the old; however, with the passing of time, they cease to be new. While not predictable, they become elements that business can also incorporate into their planning and their actions.

Our research suggests that a minority but growing number of companies seem to be learning to master the difficult conditions.

They are performing well, gaining market share, generating increased margin and reshaping their sector. The number reporting that they are taking advantage of the new market has increased from 19% in 2008 to 29% today. Almost one in three companies are reporting that they are getting to grips with the

“new normal” and finding ways to thrive.

Increasing priorities over the next 12 months

Over the next 12 months, what change do you expect in the importance that your organisation attaches to the following activities? Please rate on a scale of 1 to 5, where 1=Significant increase and 5=Significant decrease.

Shown: Percentage increase

Source: EIU panel survey, September 2011

50

39

27

18

17

50

25

26

18

51

29

26

21

17 Securing the survival of the present business

Taking advantage of the situation to pursue new market opportunities

Improving the performance of current assets

Restructuring the business to meet new conditions

Protecting your current assets

High performers Low performers Total

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How has short-term market volatility affected your plans for driving long-term growth this year?

We asked companies how the recent market volatility had affected their plans. Only one in four cited that they were not affected.

Impact

^{% overall} Difference:

high vs.

low performers

Rapid- growth vs.

developed markets

Accelerating cost reduction 43 -11 -3

Increased focus on

profitability 41 -6 -1

Increased scenario planning 39 -12 -4

Increased importance of

diversifying geographically 28 -1 +6

Holding cash to take

advantage of opportunities 27 +1 +4

Cutting funds for R&D 23 -10 +3

Restructuring debt 22 +2 +2

Securing additional equity

capital 15 +8 +6

The overall response from the majority of companies to the volatility in the stock market, and in the political environment, has been to concentrate on cutting costs and reduce exposure to risk by thinking through the possible implications.

However, high performers (defined as the top third of companies in both EBITDA and revenue growth) seem to be doing things differently. They are not focused on cost reduction — perhaps because they already have their costs under control. Nor are they frantically developing scenarios for the future — they already have a good idea of their plans and understand what the variables may be. They are certainly not cutting back on R&D: indeed, if they are particularly focused on anything, it is restructuring debt or securing additional equity.

The picture is even more distinct for companies based in the rapid-growth markets: they have even less need for cost cutting or scenario planning. They are, however, significantly more likely to be focused on new market entry, securing additional equity funding and accumulating cash to enable them to take action quickly.

A growing polarization is appearing in the market between those businesses that are struggling to respond to the new markets and a smaller group that are beginning to master the new environment. The remainder of this report explores what these high-performing companies are doing differently to respond.

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10 Growing Beyond How high performers are competing for growth in difficult times 10 Growing Beyond — Cost competitiveness From complexity to confidence

Our research shows that high performers have a focus on their customers that runs like a thread through their operations. It determines the markets where they wish to sell, what they sell and how they organize to supply the markets in question.

High-performing companies have been alert to the impact of the economic turmoil on their markets and their customers and have acted to re-establish their customer focus and relationships. They have sought to get ahead in responding to new patterns of demand.

We structure our findings in this area in two sections focusing on market and product issues, although it is

important to acknowledge that success is built by addressing them together.

Customer reach

Targeting and satisfying customer needs

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What we learnt last time

High-performing companies have been approaching new markets by:

•

Seeking to secure their domestic market first before crossing borders

•

Prioritizing markets, but showing a distinct regional approach regarding the next generation of rapid-growth markets, mostly favoring India and China — there is no new global BRIC

•

Going beyond figures to develop a deep understanding of target markets, with a particularly high focus on research into buying behaviors

•

Taking a flexible approach to market entry, but seeking cross-border learning and rapid integration

•

Reinforcing their brand and marketing efforts to increase awareness and mitigate price pressure

High-performing companies have been approaching product development by:

•

Broadening their product service offer around current customers — some 30% have increased their product range by over 20% in the past two years. In this way, they secure the relationship and grow their revenue through gaining more of their current client’s wallet (this is a very low-cost way of developing sales)

•

Focusing efforts on their most profitable market segments

•

Seeking to get ahead of their competitors when introducing new products, so that these products can achieve

premium prices

•

Regarding innovation as a core competence, focusing on current customers and their employees as the key sources of innovation

On market entry

High performers are taking care when expanding across borders

Market volatility has had a considerable impact on companies’

approach to how they will generate growth — both in relation to their process and how they act.

High performers tell us that they concentrate on maximizing their growth potential at home first and they seek geographic expansion only after careful consideration and assessment of opportunity, cost and risk.

Looking forward, there has been an uplift in the importance given to entering new markets by all our respondents — indeed low performers report an even greater awareness of the need to enter new markets.

Where are you focused to achieve top-line revenue growth?

Focus

^{% response} Difference:

high vs.

low performers Developing new geographic markets with

higher potential 39 +10

Taking share from competitors 34 +2

Creating additional value from existing

products 30 +12

Developing new products to tap new

customer segments 24 +18

Finding new opportunities for existing

assets 16 +17

Seeking alternative distribution channels 16 +1

Providing lower price range products 8 -12

Source: EIU panel survey, September 2011.

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Customer reach

Targeting and satisfying customer needs

Developing into new geographical markets, taking share from competitors and seeking to create additional value from current products were the top three routes for revenue growth. Two of these three options, however, are high risk and potentially costly. Entering new markets takes investment and time. Winning share from competitors can destroy margin. Neither promise immediate returns.

High performers shared this focus, but were significantly ahead on developing new markets and creating additional value from current products. The areas of biggest difference between high and low performers, however, related to either developing new products for new subsegments or finding new opportunities for exiting assets. In both of these areas, some of the risk and cost is mitigated by experience. Noticeably, high performers are most reluctant to move into discount ranges of product as a source of revenue growth.

Success is dependent on market understanding — and getting the right price

We asked respondents what was the number one factor for determining success in entering a new market:

Leading factors for successful market entry

What is the number one factor for your company for successful market entry this fiscal year?

Shown: Percentage of respondents.

36 21

15 7 6 5 3 3 2 2

39 21

10 6 4

8 4 2

4 3

36 20

12 8 5

7 4 3 3 3 Market demand for product or service meeting expectations

Pricing strategy appropriate to market Access to customers/distribution networks Stability and reliability of politics, legal system and regulation Extent of an equal conditions for local and foreign businesses

Access to talent Business ethics, intellectual property protection and attitudes to fraud Free trade agreements in place Favourable tax environment Infrastructure: logistics, transport and telecommunications

Success is clearly driven by understanding market demand and — some way behind — by being able to realize the price for the product or service that was expected. Deep insight into the need that is being met is the best guarantor of success in the short and longer term.

High performers show a significantly greater awareness of the importance of access to effective distribution channels.

Customers have choice, but people buy only what they have access to. Most established distribution routes will already be utilized by competitors: accessing these routes is an obstacle not to be underestimated.

It is interesting to note that much of the public discussion of market entry focuses on the role that government can play to encourage investment through initiatives such as lower tax, free trade arrangements and investing in the appropriate infrastructure. From the perspective of our respondents, these initiatives — while important and, indeed, some of the only cards that governments hold — do not seem to be the key determinant of eventual market success.

Accelerating while others slow

On process, the recent market volatility has led most companies to both reduce risk appetite and increase the sharing of

responsibility through increased internal consultation. Both are likely to lead to a slowdown and a scale down of action in market entry.

The impact on high-performing companies has also been marked:

they have adopted increased caution, but to a lesser degree than lower performers. Indeed, they report that they actually have an increased risk appetite. They are less likely to have slowed themselves through more internal consultation and more likely to engage in greater external stakeholder consultation. A difficult market can provide the greatest opportunity for step-change in a market or sector — high performers are ahead in accelerating their response to this.

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Impact of economic volatility on investment appraisal goals/

processes for market expansion

How has economic volatility changed your investment appraisal goals and processes for market expansion this fiscal year?

Shown: Percentage of respondents. Note: Multiple answers allowed.

44 39

30

24 23

23

19

50

49

37 12

23

20 24

48

44 34

19

23 22

24 Greater internal consultation for decision-making process

Risk appetite changed — now reducing risky investment decisions, secure short-term returns Increased time horizon for additional investment

Risk appetite changed — now taking on greater risk today to drive greater return in the future Reduced time horizon for additional investment

Greater external stakeholder consultation over strategies and tactics Reallocating planned investments in debt — crisis locations towards alternative locations

When it comes to action, there are distinct differences in what the two groups are doing. Low performers are much less likely to have moved into new markets during the past few months, indeed they are four times more likely to have pulled out of new geographical operations. This may be a short-term necessity given the costs of these markets, but they are clearly reducing their market potential and storing problems for the future.

Focusing on government and policy risk

The risk in entering a new market should not be underestimated.

As we found in our previous research, the rapid-growth countries are markets that have seen the greatest increase in competitive intensity since the crisis. This is driven by the arrival of many international players into complex markets that already had large and robust domestic incumbents.

Respondents generally seem confident in their ability to compete with other players. However, they have a concern about shifts in government policy, hostility to foreign investment and the lack of effectiveness or stability in local regulation and governance — all issues that are outside their control. It is interesting to note that high performers, in particular, place significant emphasis on the importance of a supportive attitude from government.

Most important risk issues addressed when evaluating geographic market opportunities

What are the most important risk issues your organization addresses when evaluating geographic market opportunities?

Shown: Percentage of respondents. Note: Multiple responses allowed.

Source: Ernst & Young Client Service Partner survey, September 2011.

35 32 24

30 19

14 14 14 5

23 23

31 39 15

15 23 15 0

30 23 22 22 18 13 9 8 8 Adverse shifts in government policy Unsupportive attitude from government towards FDI Lack of stability and effectiveness of local government Levels of bribery and corruption Protection of property rights and IP

Level of bureaucracy and red tape

Inefﬁciency and opaqueness of the legal and court system Threat of civil unrest or external military threats Impact of trade unions and pressure groups

The rapid-growth markets clearly play an important role in the future growth of the world economy. Our research, however, suggests that they do not provide a simple or guaranteed solution for all companies. Many companies can most improve their performance by a focus on their domestic market and adjacent international opportunities.

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Customer reach

Targeting and satisfying customer needs

On product

Careful choice of customer segments is key to product growth

Globalization has driven the appearance of consistency — often amplified through the use of shared branding or packaging — but in practice, markets today are very rarely uniform and a single product or service offering is not sufficient to cover all customer segments or geographic markets. Differentiated products will only be successful if the features that make them different truly resonate with clients’ requirements, and if there are sufficiently large segments and demand structures at which the product differentiation can be aimed.

The continuing success of top performers demonstrates that it is the careful choice of customer segments that allows a company to create truly unique positioning and long-lasting competitive advantage.

Our recent research has shown a huge increase in focus on new product development: indeed, the overall response on R&D as a business priority has doubled since last year. A wide range of tactics is being used to analyze the opportunities.

Rapid-Growth Markets Forecast:

rapid-growth markets are the key drivers of global growth

Many rapid-growth markets have traditionally had an export-led model of growth. Their growing influence, however, has led to the emergence of a substantial middle class, which is creating domestic consumer markets of critical mass.

The middle class population in rapid-growth markets, particularly Asia, is expected to reach significant

proportions. For example, the number of households in Asia with an income in Purchasing Power Parity PPP terms of between US$10 and US$100 a day is expected to triple between 2009 and 2020 to 1.75 billion. As a result, demand for consumer goods and services (including foreign holidays and financial services, as well as cars, electronics and other luxury products) is expected to boom. To illustrate, the number of international tourists traveling from China is forecast to almost double from 32 million in 2010 to 59 million by 2020.

Little wonder that the rapid-growth markets are projected to account for 38% of world consumer spending and 55% of world fixed capital investments in 2020, as well as 54% of world demand for motor cars and 48% of world production of consumer goods.

For further information please see Ernst & Young's Rapid Growth Markets forecast and visit www.ey.com/rapidgrowth.

Tactics used to analyze product/service opportunities

Which of the following tactics to analyze product or service opportunity are the most important for your organization?

Shown: Percentage of respondents. Note: Multiple responses allowed.

Source: Ernst & Young Client Service Partner survey, September 2011.

38 38 30

35 32 27

30 30 3

39 8

31 31 23 15

23 15 8

28 24 23 22 22 21 19 16 5

Direct feedback from clients and users Use of market and business intelligence data and systems Insights from sales force and/or distribution partners Customer segmentation analysis Observations from own people Comprehensive planning process Systematic market research Driven by technology development and R&D Ad hoc and by trying acceptance in market

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The more the needs of the customer are compromised by the needs of internal segmentation, the less the product is fully meeting the customer need and the less value is created.

A wide range of segmentation tools is being used

We have commented before on the greater use by high performers of analytical tools to understand their market and their future opportunities. Such tools enable the analysis of vast quantities of data and improve the company’s ability to sharpen their segmentation. High performers are using a range of tools more extensively than others, although direct feedback from current clients is the highest-rated tool for all companies.

A strong focus on key segments and greater understanding of customer needs is vital. The more the needs of the customer are compromised by the needs of internal segmentation, the less the product is fully meeting the customer need and the less value is created.

To become more successful, a company may need to make a reassessment of its core customer segments, identifying areas of difference that can form the basis for a sharper selling proposition. Tighter market and customer segmentation enables top performers to achieve this by increasing the perceived

“value” of their service or product by tighter alignment to the individual customer needs and desires.

Most companies claim to listen to their customers, but high performers actually also listen to their employees for more than low performers, recognizing that their own people have great expertise in the products and services they sell and can also spot a gap in client needs. Encouraging innovation from employees is a great motivator; indeed some of the anecdotal feedback from our research found that empowering employees to innovate for customers without active management direction and control can be optimal.

Product development is key to the emerging middle class market

Selling premium products to wealthy consumers has long been a successful approach to globalization, as the strength of the global luxury brands attest. This segment is growing, as the numbers of the wealthy increase in rapid-growth markets such as India or China. But the big new opportunity is to sell products and services to the emerging “middle class” from these rapid- growth economies. The demographic growth in this group is simply astounding, with the forecast arrival of some three billion middle class consumers over the next decade. To put this in context, the current developed market population is little over one billion today.

Our previous research has shown the emerging middle class to be the focus for most of the “globalizing” companies, but this focus is not necessarily shared by all the high performers — they tend to vary their focus by market. The slow convergence in purchasing patterns does not match the speed with which brands have been established and terms such as “middle class” are relative rather than absolute. In the context of the rapid-growth economies, the term is used to apply to people whose income will be between

$10 and $100 dollars a day, although it is likely that the majority will be toward the bottom of that spectrum. This has major implications for product development.

High performers ahead in driving innovation

High-performing companies recognize the value of innovation:

they consequently have processes in place to support this.

Inspiration can come from anywhere and no one has a monopoly on good ideas. But successful product development is more likely to result from structure and proactive effort. High performers are

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Customer reach

Targeting and satisfying customer needs

For further information on this subject, see Customer reach: targeting and satisfying customer

Topics covered include how to: targeting and satisfy customer needs to find new sources of revenue growth

•

Extending customer reach beyond existing borders — market assessment; new geographies and new market risks

•

Market segmentation — investing in deep consumer understanding and focusing first on clients and competition

•

Product development and innovation — innovation drivers, creating a company culture that welcomes innovation

•

Sustainability, climate change and ethical sourcing as drivers of new growth — changing customer preferences; taxes, incentives and credits

The chart shown below is taken from our new study — Innovating for the next three billion — and shows there is a broad range of approaches being adopted to address this issue. These vary from a repackaging of current products, say, in smaller sizes, through to developing new products entirely. Interestingly, the biggest difference for high performers occurs at either end of the spectrum. Understanding the true nature of demand determines whether repackaging or complete redesign is required.

Approaches to new product or services development in rapid growth markets. EBITDA growth: high vs. low performance

Which of the following approaches do you currently take to developing products and services aimed at lower-income customers in rapid growth markets?

Base: EDITDA growth high performers (241), low performers (167).

Source: Ernst & Young, Innovating for the next three billion, 2011.

55

43

37

32 50

32 35

17

We change the pricing structure or business model of existing products to make them more affordable

We create entirely new products with lower-income customers in mind

We simplify current

premium products We repackage products and services aimed at higher-income customers (e.g., in smaller sizes)

High performers Low performers

The next three billion: capitalizing on the rise of the global middle class

Between now and 2030, the number of people in the global middle class will grow from 1.8 billion to 4.9 billion. The majority will live in Asia and other rapid-growth markets.

In the past, developed world companies would typically take premium products that sold well in their home market and either sell them unchanged in rapid-growth markets, or strip them down to make them more affordable. Premium products may have sold well to the elites, but they were often irrelevant for the vast proportion of the population on lower incomes. Stripped-down products may have been more affordable, but they were not sufficiently tailored to meet the specific needs of local customers.

To understand the unmet needs of the new middle-income customers and to create entirely new products and services to fulfill them. This will mean, thinking differently about every stage in the product development process. Strong R&D capabilities will be important, as will deep customer insight and a culture and mind-set that supports innovation.

For further information please see Ernst & Young's Innovating for the next three billion report and visit www.ey.com/growing beyond.

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Key questions for management

• Which market(s) will be the most important in the short, mid and long term, and how do your investment plans prioritize these markets?

• Do you have the right processes, information systems and experience to assess market opportunities and implement strategies?

• Do you understand your optimum geographic footprint in light of shifting risks, opportunities, regulation and levels of government intervention in different regions?

• What alternative business combinations, market

entry strategies and channels are you considering

to further market reach, while managing risk and

without over-extending capital?

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Operational agility

From supply chain to integrated value chain

Windows of opportunity are opening and closing faster than before — and they are of different sizes for slightly different products or services and in different locations when they do. Operational agility is the term we apply to describe an organization’s ability to respond to such a market opportunity, or indeed, threat.

Our Growing Beyond survey confirmed the findings of our earlier surveys, that speed and flexibility are key to the capability of an organization to respond quickly to market opportunities and threats.

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On speed

Speed of action really matters …

Being able to take an idea to market more quickly than a competitor and to take full advantage of new technologies to get closer to key customers, is vital to future growth in today’s marketplace. Quicker response times help companies to react to client needs faster, and hence, gain or hold market share. It also helps companies to respond to negative development faster.

Speed of action is one of the great attributes of the high performer. Lower performers can see the same opportunities, or can even bring together the right insight with the right authority to take a decision, but it is the speed of action that really matters.

This has been confirmed by the findings from our September 2011 research. When asked how companies were acting to increase their speed to market, empowering local decision- making was the highest response — chosen by 49% of all

respondents. High performers put even greater emphasis on this, as well as the need to empower employees to innovate without active management intervention.

High performers, however, are also active in seeking speed from their suppliers and distribution partners. They are significantly more likely to be willing to change both, in order to achieve a faster time to market.

“Delayering management to increase speed of decision-making”

was rated the lowest response for all respondents and especially high performers — the notional increase in speed by empowering fewer people, being outweighed by the almost impossible role scope that can accompany such moves. Management cost is reduced, but quality of decision-making and speed of execution are not necessarily enhanced. There is a strong correlation between quality of decision-making and the speed with which empowered employees implement.

Operational agility is a fundamental shift for business, much of which had been marching to the different tune of “global standardization” prior to the crash. As we have seen from our research, this shift has presented a huge challenge to both process and management — one that high performers are embracing. Active delegation and empowerment are now far more relevant than control, with the focus on coherence rather than consistency.

So, successful companies are ensuring that their strategic agility is fully underpinned and propelled by their operational agility. Maximum agility is achieved when these two factors come together.

What we learnt last time

High-performing companies have been gaining speed by:

•

Putting greater emphasis on the need for speed within the organization

•

Decentralizing decision-making closer to the market to enable quicker response time

•

Moving production closer to the target market to reduce distance to market

•

Building launch and review into the development process to ensure a seamless process

High-performing companies have been increasing flexibility by:

•

Enhancing flexibility of their supply chain to respond to smaller but profitable opportunities

•

Refocusing on incremental rather than transformational innovation

•

Being flexible on how they approach different opportunities

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Operational agility

From supply chain to integrated value chain

... but it is important to focus on longer-term goals too

Speed is about process, but also seems to be about culture and engagement. We were interested to see whether this focus on speed translated into high performers having a shorter time horizon. On the contrary, we found that, while high performers may stress the need for speed of response, they actually have longer-term goals.

Methods for increasing speed to market

How are you increasing your speed to market?

Shown: Percentage of respondents.

53

38

36

35

28

27

44

31

38

28

35 Empowering local decision-making closest

to the market Empowering employees to innovate without management intervention Seeking jointly beneﬁcial partnering agreements with key suppliers and distributors Changing supply and distribution channels to respond to market changes Selling homogeneous product or services with tailoring limited to marketing and pricing Delayering management to increase speed of decision making

High performers Low performers

What time horizon does your company work to?

Action

^%difference:

under 12 months

High performers majority response

Low performers majority response Maximize sales from existing

assets +10 12 months Under 12

months From identifying opportunity

to market entry +7 12 months

to 18 months

Under 12 months

Achieving cost benefit from

offshoring +1 12 months

to 18 months

12 months

Expecting a return on

investment from new product +5 2–3 years 12 months Synergies and measurable

benefits from acquisitions +2 2–3 years 2–3 years Expect return from

investment into a new geographic market

+11 2–3 years 2–3 years

In most cases, lower performers seem to be working to a shorter time frame. This may reflect the pressure of underperformance, but it also suggests unrealistic goals. Achieving a return from any new market in under 12 months is very unlikely, so the internal investment hurdle may be too high. If companies cannot hit opportunity expectations, investment reluctance will extend beyond the formal process to affect the wider culture.

Additionally, when an organization sets too high a benchmark for new product development, the end result can be to stifle all R&D programs.

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What have you done to increase flexibility and speed?

On flexibility

Organize around the customer

Flexibility is essential if the company is to be able to cope with positive or negative changes in markets and regulations.

Companies are focusing on making both their back-office and front-office processes more agile to gain competitive advantage, and this often means challenging traditional organizational structures to fit new business realities. All of the components that make up the company’s value chain must be aligned, so they fully support each other and run like a finely tuned performance engine — from procurement to after sales.

In our September 2011 research, we investigated what some 300 of our clients were doing to address both issues:

Action

^{% of}_response Difference:

high vs. low

Organize around the customer 26 -4

Broaden the product or service portfolio 20 +30

Empower local decision-making 20 +9

Engage and incentivize employees 13 +19

Reduced the product range 10 -7

Increased use of digital sales 9 +11

A majority of respondents answered that they were seeking to organize around the customer, so having the customer at the center of thinking is clearly an important first step.

Empowering and engaging employees to be more responsive is also critical. Decentralizing and enabling local decision-making to aid speed and a flexible, close-to-the-market response — the

“informing, supporting and trusting” culture — is a key area of difference. High performers seem to recognize that proactive measures may be required to get even good employees on side in the quest for speed and flexibility.

There is also a big difference between high and low performers in their use of digital sales tools. As adoption increases, these have the ability to link directly from consumer to supplier, cutting out many of the obstacles to speed to market. But the real power of digital is the power to manipulate masses of data to customize response to the specific client.

The biggest area of difference — and the one with the most significant implications (and possible costs) — relates to product range. The temptation to focus product range for speed and efficiency reasons is a strong one, but high performers are ahead in going the opposite direction. The trade-off on cost is perceived to be outweighed by the increase in sales.

Flexibility has a cost and, if taken too far can cause confusion both internally and in the market. Anecdotal evidence suggests that optimizing flexibility may best be achieved when an organisation is very clear about those areas which are fixed.

A framework of stability may, paradoxically, be the foundation for optimal flexibility. It is the content and the shape of that framework that is key.

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Operational agility

From supply chain to integrated value chain

For further information on this subject, see Operational agility: from supply chain to integrated value chain Topics covered include:

•

Achieving strategic agility — planning, budgeting, forecasting and reporting; trend identification; risk management

•

Achieving operational agility — optimizing the supply chain; responding to new customer needs — better and faster than the competition; enhancing sales processes and systems; achieving flexibility in the workforce; the important role of IT; business process outsourcing

Customization and variation are key

Gaining business flexibility requires a company to establish the right balance between adaptability, agility and stability in their operating model, cost structure and processes. Adaptability is important because technology, the marketplace and customer demand are changing so quickly. Agility allows companies to enter new markets quickly and efficiently. And it’s vital to be able to make these changes without compromising the underlying stability of the company.

The primary driver of globalization used to be the perception of an increasingly “global market” and the opportunities that implied for standardization and economies of scale. According to our research, today’s high performers do not talk about global standardization and consistency — rather they see an immense market opportunity through greater customization and variation, which is supported through a truly global operation.

It follows that broadening the product range and more local customer variation must be supported by more flexible systems in order to keep the cost of such variation affordable. For example, effective supply chain management is increasingly viewed as a powerful catalyst for companies to secure new market share and drive revenue growth. Our research also shows that many top- performing companies are gaining flexibility through mobilizing their workforce and by business process outsourcing.

Delivering improved supply chain results

Today’s business environment for large, global companies is more fluid and complex than ever before. Companies are adapting their supply chains to respond to increasingly competitive market conditions and to deliver higher revenue and greater value to their shareholders and customers.

The increased use of locally sourced materials, or products assembled in their final market destination, has led many companies to re-think their supply chain. Being closer to the end consumer allows for greater responsiveness to local trends and speeds response and production times.

Many companies that want to stay close to their markets, but improve supply chain performance, are creating regional or subregional supply chain hubs to combine local execution with regional and global management. This approach also offers greater control over managing responsibility for profit and loss, as well as for individual country strategies. In addition, it improves the responsiveness and expertise at the regional supply chain level.

A regional management function can also deliver significant cost savings through internal shared services such as marketing, finance and human resources support to individual markets.

For further information please see Ernst & Young's Driving improved supply chain results report, November 2010.

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Key questions for management

• How flexible is your supply chain; from supplier choice through manufacturer to customer?

• How quickly could you profitably respond to a 25%

increase in demand? Or a 25% fall?

• Is your business prepared for the growing competitive pressures from low-cost emerging market exporters, as they make inroads into existing markets and, even more so, into other fast-growing markets?

• Do outsourcing, offshoring and shared service centers play a role in improving operations and increasing your speed to market?

• Do you use technology effectively to improve

operational efficiencies and manage risk?

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Cost competitiveness

From complexity to confidence

Sustainable growth is now the ultimate goal for many, and this requires focus on all cost and revenue drivers. Our survey revealed that top-performing companies are building flexibility into all aspects of their business to achieve the cost competitiveness they need. This requires a holistic approach to pricing, costs, cash and capital that covers both the organization itself and its wider supply chain.

Having the lowest costs is not a guarantee of market

success. We see cost competitiveness as a level of operation that allows an organization to go on winning sales at a price that generates a sufficient level of return both for stakeholders and for the investment needs of the business.