April 4, 2006    Volume 13, No. 7

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Stampede To Fast Growing Markets Has Only Just Begun: Organizational Structures Must Change In Order To Capitalize On 'Massive Shift' Offshore

BY RICHARD McCORMACK richard@manufacturingnews.com

"A large portion of global commerce is in the process of quickly migrating from established markets to rapidly developing economies," according to the Boston Consulting Group. "A massive shift is under way in the world's economic center of gravity. Today the prize for getting global organization right is huge -- as is the price to be paid for getting it wrong."

Companies expect to dramatically increase investment in manufacturing, sourcing, sales and R&D activity in rapidly growing economies through 2010, says the consulting firm. "Almost all of the companies we surveyed plan to increase their investments in rapidly developing economies significantly in 2006" due to continuing cost and capital advantages, an increasingly talented workforce, the migration of customers and the emergence of indigenous suppliers and competitors in those markets.

In 2005, 10 percent of the big companies surveyed by BCG said they manufactured 50 percent or more of their products in these fast growing markets. By 2010, that level is expected to top 25 percent. By 2010, 20 percent of companies expect to be sourcing more than 50 percent of their goods in these markets, up from 7 percent in 2005. Sixteen percent expect 50 percent or more of their sales to be in these markets by 2010, up from 7 percent in 2005. In the area of R&D, only 2 percent of companies said they were conducting 50 percent or more of their research in fast emerging markets in 2005. By 2010, that will increase to 9 percent.

A whopping 67 percent said they plan to "significantly increase" investment in sales operations in these markets; 51 percent said they will "significantly increase" investment in manufacturing, with another 29 percent saying they plan on a "slight" increase in manufacturing investment.

Industries that are mature in the United States are booming in the fast growing economies, with annual growth rates of 20 to 50 percent or more per year. As a result, American companies that pride themselves on the mundane aspects of protecting market share and reducing costs "must be prepared to invest -- quickly, decisively, repeatedly and often in advance of demand -- to acquire the right talent and resources to capture that growth" in the emerging markets, says BCG. "This requirement entails a fundamentally different mindset and skill set in the people leading these operations. It also means that frontline managers must be constantly building and adapting their organizations or they risk diminished growth."

The big companies that BCG surveyed say their sales from these markets will increase from 21 percent of overall sales in 2005 to 34 percent in 2010. But only 18 percent of their employees, 13 percent of their assets and 10 percent of their top 200 managers are located in these markets.

This misalignment poses challenges, particularly since these markets are so dynamic and different. "For expatriate managers, unfamiliar legal and employment practices, compounded by pervasive cultural differences, all add to the tension," says the analysis. "Companies must learn to function effectively and grow while competing with lower-cost local companies with better ties to regulators, deciphering rapidly developing regulations, decoding unfamiliar customer preferences and mastering unique local business practices."

There are massive changes taking place in every aspect of these societies and markets: customer needs are changing; competition from foreign and local companies is growing, distribution channels are diversifying; infrastructure and resources are questionable; and recruiting is a challenge. Huge risks are also present. Protecting intellectual property, preparing for political upheaval, and creating an organization that can deal effectively with all of this pose additional challenges for managers. "The ways of doing things that historically served the company well may not meet the demands of rapidly developing economies' markets and organizations."

Companies that are successfully operating in the fast-growing markets are developing organizations that overcome misalignments of personnel and thinking. The key ingredients to success are having an engaged leadership, developing collaborative structures, continuously attracting talent, and developing common processes, platforms and core values.

"Senior leaders in the most successful organizations are distinguished by high levels of engagement in rapidly growing economies," says BCG. "They actively set direction, ensure senior-level sponsorship, orchestrate resources and overcome barriers."

The 28-page report, "Organizing for Global Advantage in China, India and Other Rapidly Developing Economies," is located at http://www.bcg.com/publications/ files/Organizing_for_Global_Advantage_in_China_India_and_Other_Rapidly_Developing_Economies_Mar06.pdf.

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