By Thomas A. Olsen, Monica Pinto and Shalina Virji

  

Multinational corporations (MNCs) are scouring the globe for growth, and increasingly they are finding it in emerging markets. Real GDP is forecast to rise three times faster in Brazil, Russia, India and China (the "BRICs" economies) than in the leading developed nations over the next six years – about six percent annually versus two percent.¹ Coca-Cola predicts that the BRICs will contribute 41% of the company’s carbonated soft drinks growth by 2008.² Ford Motor expects emerging markets, led by Asian countries, to drive 80% of the growth in its automotive sales volume over the coming decade.³ From banking in Brazil to razors in Russia, emerging markets are becoming a bigger and more important part of companies’ top and bottom lines.

While the promise of these markets is alluring, the potential pitfalls are substantial – and often underestimated. First, companies must grapple with the same growth challenges they face in any market – understanding what customers really want, developing distinctive and affordable offers, marketing them effectively and overcoming internal organizational barriers. On top of that, they must deal with the volatility and unpredictability of developing markets, which can cause even the most seasoned managers to stumble. As if those challenges weren’t demanding enough, decision-making processes and communication with the head office are often too inflexible or inefficient for subsidiaries to react quickly to fast-changing conditions. The challenge is not unlike trying to navigate an 18-wheel tractor-trailer down a narrow, winding dirt road – while racing local competitors on motorcycles.

In this article, we argue that in order to achieve sustainable profitable growth in emerging markets, MNCs need to rely less on preexisting corporate management models and more on a flexible, principle-based set of practices that can change from market to market and even from year to year. Such practices will help local and corporate leaders steer the path to long-term success more nimbly than standard models. We focus on six in particular: (1) how long-term direction is established and reviewed; (2) how the emerging market business fits within the organizational structure; (3) how roles and decision rights are defined between headquarters and the local leadership; (4) how local decisions are prioritized and how fast they are made; (5) how resource allocation can be made more flexible; (6) and how performance is monitored and managed. To fully capture the emerging market growth opportunity, MNCs must strike the right balance in each of these areas, surmounting the inevitable tension between global standards and on-the-ground realities.

1. Maneuvering Down the Winding Road
Greater uncertainty and macroeconomic volatility makes defining a long-term direction and objectives significantly more difficult in emerging markets. According to a 2004 World Bank survey, 40% of senior managers in developing markets ranked economic and regulatory policy uncertainty as a "major or very severe constraint."⁴ Hence the oft-heard complaint: "I don’t even know what will happen next month – how can I set objectives for five or 10 years from now?" Yet, paradoxically, emerging market subsidiaries badly need long-term goals and objectives to help guide them through near-term gyrations in local conditions. By setting a clear long-term direction– and managing to it – companies can avoid overreacting to short-term fluctuations that could lead them off course.

The best way to define a long-term direction over a five- or 10-year horizon will vary case by case. But typically the direction should articulate an explicit view of:

• the future market and competitive landscape (e.g., customer and regulatory trends);
• a broad but tangible ambition across key financial, competitive and operational dimensions (e.g., triple intrinsic value or economic profit, secure the number one or two market share position, become the low-cost producer);
• the medium-term (two- to five-year) priorities that will enable the business to reach its broad ambition (e.g., enter new markets, develop new products, consolidate production).

In addition, management should map out a near-term path for executing its mid-range priorities. The near-term path will twist and turn as the business adapts to changing conditions, but it should use the long-term direction as a guide. It should also take into account market and competitive scenarios that management envisions in the medium and long term. Competitive scenarios are typically built from high, low and mid-range assumptions about market growth, pace of deregulation and other economic conditions. Figure 1¹ illustrates conceptually how the long-term direction and scenarios can be used to establish boundaries for expected near-term volatility over time.

An explicit long-term direction, supported by scenarios, serves three important purposes: First, it acts as the anchor against which decisions can be tested. Second, it aligns expectations upfront between local and corporate leaders on the potential range of conditions and implications for results and resources. Third, it defines the criteria for when local market changes should trigger a fundamental strategy discussion between the subsidiary and the corporate center – i.e., whether to revise the long-term direction. Of course, neither side should be rigid in its pursuit of the long-term direction. The best path depends on management’s ability to balance near-term performance with investment for the long term.