PwC - View Issue 15

Issue 15 Cybersecurity Beyond the BRICS

Interview with P&G’s Deb Henretta

24 34 46

Designing your fiercest competitorMastering change by making it real page 12

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Features

View points

12 Cover storyDesigning your fiercest competitor How do leading organizations stay ahead of change? Learn about the critical STEEP drivers that are accelerating change—and about how companies move beyond theory and into action by becoming the industry disruptors they envision. John J. Sviokla and Adam J. Gutstein

24Cybersecurity: The new business priority The stakes are higher than ever—intellectual property loss, fraud, potential litigation, and damage to your brand. What company leaders need to know now about the growing risks and the strategies for safeguarding the business. Gary Loveland and Mark Lobel

Departments 2 My view Embracing a new dynamic: Foresight and risk taking in a changing global marketplace Bob Moritz

54 Rear view Are you designing a disruptive business model to keep your fiercest competitor at bay?

4 Talent crunch: APEC business leaders forecast hiring challenges

6 The next test for nuclear

8 Ranking business-friendly cities

9 The health industry gold rush

10 All in the family: Private companies voice their challenges and opportunities

46 Interview Sharing in Asia’s growth Deb Henretta, Procter & Gamble’s Asia Group President and chair of the APEC Business Advisory Council, discusses the challenges and opportunities of doing business in the region. Interview by Tom Craren and Gene Zasadinski

viewIssue 15

34Beyond the BRICS Economic growth engines like China, India, and Indonesia are on the radar of virtually all companies today. As the world turns to the East, business leaders can draw valuable lessons and strategies from the consumer goods companies that are already established in the region. John MaxwellPage 44 Navigating the risks and opportunities in emerging marketsFive ways companies can balance the challenges and rewards. Harry Broadman

What does your fiercest competitor look like? Make the most of an uncertain future, page 12.

2 PwC View Issue 15

organizations’ prospects for revenue growth over the next three to five years.

Such confidence is well founded. In the US, growth seems to be starting, but at lower than needed levels, while unemployment remains persistently high; and in Europe, growth is all but stalled. However, wages in APEC markets are continuing to rise, creat-ing higher disposable incomes. This, along with growing regional trade links and the evolving promise of a networked economy, is creating substantial opportunities. But I think there’s more to it. I believe this confi-dence is also rooted in their ability to take the long view with regard to tomorrow’s opportunities and to cultivate resilience rather than aversion when confronting risk.

Let’s consider a few examples. With regard to the long view, many of the APEC leaders understand that they are the beneficiaries of a major shift in economic power, and they are planning now to seize opportuni-ties as they become available. For instance,

My view

Embracing a new dynamic Foresight and risk taking in a changing global marketplace

By Bob Moritz

Bob Moritz is US chairman and senior partner of PricewaterhouseCoopers LLP.

1 Asia-Pacific Economic Cooperation. According to its mission statement, “APEC is the premier Asia-Pacific economic forum.” The full statement is available at http://www.apec.org.

There’s been a lot of focus lately on the changing business dynamic between the developed and developing economies—the West and the East. Clearly, the center of grav-ity is moving to the developing world, where the increased spending power of an emerg-ing middle class is creating opportunities for growth. The implications of this changing global business landscape are profound, particularly as they affect strategic matters of most concern to multinational companies hoping to succeed in a brave new world.

For developed-world organizations, much can be learned by assessing the perspectives of their counterparts in the emerging world. As an APEC1 Knowledge Partner, PwC conducted a survey of more than 300 APEC region industry leaders representing 26 countries and all 21 APEC economies. Despite economic stresses, such as weaker than desired US growth and euro-area uncertainty, nearly all (96 percent) were somewhat or very confident about their

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They tell us they are coping with complex regulatory regimes, inconsistent and haphazard standards, corruption, talent shortages, and natural disasters. And they are certainly not immune to the effects of the global economic crisis, particularly the continued weaknesses evident in certain economies or the downstream impact of slowing economies, for example, in China. Unlike many Western companies, however, they have not stopped taking risks. They are, in fact, continuing to invest in the region.

While 44 percent are making their largest investment in China over the next three to five years, they are also investing in less predictable locations such as Indonesia and Vietnam. Only 10 percent expect to be making their largest investment in the US, perhaps for the very reasons that risk tak-ing has declined in the West—uncertainties around, for example, fiscal and monetary policies, demand for goods and services, and regulations.

In drawing these comparisons concerning business foresight and risk taking, I want to stress that differing cultures, experi-ences, and priorities will always result in different approaches. But I think we can all learn something from an awareness of such differences.

The US and Europe have, understandably, been engaged in coping with the economic crisis and its aftermath—a necessary and ongoing task. The fiscal, monetary, and regulatory issues need to be addressed, but so too do the barriers that are impeding the long-term perspective required to create in-vestment and risk-taking opportunities that ensure prosperity and growth. While the former is surely important, it is in the latter where the solutions necessary to maintain-ing future competitiveness reside.

That’s my view. What’s yours? We’d like to know. Send us your comments at pwc.com/view.

44 percent of APEC business leaders see the rise in spending power in Asia as the single biggest opportunity for growth. In prepar-ing for that growth, nearly all (94 percent) are planning a change to their current approach to innovation, with 43 percent considering significant change. And while talent shortages and high turnover among top performers remain strong concerns, 43 percent of businesses in APEC plan to expand headcount by at least 5 percent a year over the next three to five years.

In addition, APEC leaders are equally focused on the growing significance of technology in a rebalancing global economy. In fact, more than 80 percent of business leaders in APEC countries plan change in their use of new technologies, like enterprise mobility and cloud computing, with one-third planning significant changes.

Despite their confidence and long-term perspective, APEC-market companies—like Western companies—are not free from risk.

With regard to the long view, many of the APEC leaders understand that they are the beneficiaries of a major shift in economic power, and they are planning now to seize opportunities as they become available.

4 PwC View Issue 154 PwC View issue 15

View points

Talent crunch: APEC business leaders forecast hiring challenges

Strategy and growth

As a measure of the true potential of the global economy, growth in the East is a pretty good yardstick. Investment oppor-tunities are strong in the diverse range of 21 Pacific Rim economies that comprise the Asia-Pacific Economic Cooperation (APEC), as demonstrated at the December 2011 annual APEC CEO summit for which PwC was Knowledge Partner. In a survey PwC conducted at the event, CEOs and other business leaders from the critical region made one thing especially clear: The continued growth in Asia Pacific’s emerging economies over the next three to five years will generate billions in economic activity.1

The survey of more than 320 industry leaders in 26 countries revealed that more than half of respondents are very confident in revenue growth over the next three to five years; among those based in China, Hong Kong, and Chinese Taipei, the figure rises to 76 percent. But companies looking to expand their businesses in the burgeon-ing region should be mindful of what some who were surveyed see as the greatest obstacle to growth: a potential talent crisis.

While several issues pose a threat to slow growth—like political instability, corrup-tion, and restrictions on labor mobility or immigration—talent concerns are a top priority. It’s a multi-faceted issue, though many of those surveyed indicate that they expect to face difficulty in recruiting em-ployees under the age of 30, and they are afraid of losing a bulk of their workforce to retirement and undergoing high staff turnover for several years to come.

Sixty-five percent of global business leaders in both mature and fast-growing economies say that the threat of competitors recruiting the best potential candidates is a key chal-lenge they expect to face in the next three to five years. Their second concern? The limited supply of skilled candidates from which to choose. In fact, about 85 percent state that a talent shortage will be a barrier to their organization’s growth within the APEC region in the coming years.

Most distinctively, high unemployment rates in a country do not mitigate concerns about locating quality candidates: Some US

businesses specifically point out that they’re struggling to find candidates with the right managerial experience and high-level skills, particularly in the scientific and engineering professions. In the Asia-Pacific region, more employers in global surveys routinely report difficulties filling jobs, and China is currently dealing with critical shortages at the senior management and executive levels, according to the 2011 APEC report.

With growth of the working-age population projected to decline—in APEC countries, the growth rate drop in the next decade will be more than 50 percent from the previous 10 years2—the timing of such a decline in talent may be inevitable. But the problem is made worse by uneven educa-tional systems that fall short of producing candidates with the right skills. Already, 29 percent of employers in fast-growing economies say they have difficulty forecast-ing available talent.

Still, expansion plans are ambitious. Even as labor costs rise in fast-growing economies, half of industry leaders in these markets

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Customizing employee incentives and benefits to different economies

Using more nonfinancial rewards to motivate staff

Developing apprenticeships/internships

Deploying more staff on international assignments

Incentivizing younger workers—between 16-30 years

Partnering with governments/education systems to improve skills

Change policies to attract and retain more women, including in leadership positions

Increased salaries

Working with government to build institutions of higher learning

Increased recruitment and retention of older workers—more than 55 years

No changeSource: PwC, 2011 APEC CEO Survey Some change Significant change

14% 66%

11% 68%

16% 62%

27% 57%

66%20%

24% 61%

44% 44%

10% 75%

44% 42%

48% 42%

20%

21%

22%

16%

14%

15%

12%

15%

14%

10%

CEOs in fast-growing economies are changing talent approaches on many frontsexpect to increase headcount by at least five percent over the next three to five years, escalating an already serious talent crunch.

How will businesses in fast-growing economies change their approach to talent to address these challenges? Many plan on refreshing their talent programs with more attractive benefit packages, increased wages, and more nonfinancial rewards. (See Figure.) Amping up salaries is on the radar of 90 percent of companies surveyed, pointing to a push for employee loyalty and incentive. To keep current employees competitive, ongoing training that develops their skill sets is also a savvy option.

Clearly, a combined effort of attracting worthy candidates and retaining them for long-term skill development is key; 45 percent of business leaders in both mature and fast-growing economies say that high staff turnover will be a challenge in the next several years.

1 APEC CEO Survey 2011, APEC: The future redefined.

2 PwC analysis based on various historical and forecast sources.

6 PwC View Issue 15

With the world’s population at seven billion—and counting—the escalating demand for energy and other natural resources is a hard reality facing both gov-ernment and industry. Take, for example, electricity: Global demand for electricity is forecast to increase 75 percent by 2035.1 Add to that the growing focus on climate change and environmental concerns, and we find ourselves at a critical juncture that a new PwC analysis describes as a “cross-roads for energy production.”2

While many observers point to renewables like solar and wind power as the solution to meet future demand responsibly, the report discusses why nuclear energy is not easily dismissed as part of the equation. Even in

View points

The next test for nuclear

CapItal projeCtS and InfraStruCture

the most optimistic scenarios, renewables would satisfy only about one-third of global demand.3 Nuclear power is a viable option because it can provide reliable electricity on a large scale. For example, the power generated by one nuclear plant—2,000 megawatts—is equivalent to the power generated by a thousand wind turbines.

Yet in the aftermath of the Japanese tsunami and the Fukushima accident, debate continues about the role of nuclear power in the US and around the world. Nevertheless, industry experts look toward a nuclear renaissance. They believe that the Fukushima accident, which occurred at a 40-year-old plant, has forced a re-evaluation of safety issues

#1Lithuania

#3Slovakia

#2 France

#4 Belgium

Rankings of the nations generating the greatest percent-age of electricity from nuclear power:5

and underscores why a newer generation of nuclear power plants that adhere to exacting design and safety standards must be part of the energy solution.

With 27 plants under development, China could very well be the world’s proving ground for next-gen nuclear. In the US, two projects, Vogtle in Georgia and V.C. Summer in South Carolina, are in the early phases of construction. The success of these projects—and the future of nuclear—relies upon demonstrating that new and safe reactors can be built on time and on budget. Updated control analytics and asset management tools are believed to be the keys to making this happen.4

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12Number of countries that generate over one-third of electricity by nuclear power

23–54The number of new nuclear plants needed globally per year to replace decommissioned plants and to increase nuclear’s share of total electricity generation

64Number of new nuclear plants currently under construction worldwide

72From 2007 to 2035, percentage of world expansion in installed nuclear power capacity that is expected in non-OECD countries

440Number of nuclear plants in operation worldwide as of February 2011

78.7Projected percentage of global gross nuclear power generation increase from 2008 to 2035

1,500Gigawatts of nuclear power needed worldwide to reduce global carbon emissions by at least one billion tons per year by 2060

Percentage of world electricity production provided by nuclear power in 2009

14%Estimated change in world electricity production by nuclear power by 2030, if carbon legislation and other inducements are adopted

#1 United States

#3 Japan

#2 France

Rankings of the top three countries generating the most electricity from nuclear power:

+49%

1 International Energy Agency, World Energy Outlook 2010.

2 PwC, Gridlines, “What’s next for nuclear power?” 2011.

3 U.S. Energy Information Administration, International Energy Outlook 2010.

4 PwC, Gridlines, “What’s next for nuclear power?” 2011.

5 Ibid.

6 Ibid.

Source: International Atomic Energy Agency, as of May 2011 http://www.iaea.org/programmes/a2

Nuclear power at a glance6

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Ease of Doing Business rankings

Ranking business-friendly cities

CItIeS of opportunIty

New York, Tokyo, Paris—or somewhere else. Which of the world’s cities is the friendliest to business? That’s just one question explored in detail by the Partnership for New York City and PwC in the annual Cities of Opportunity report.1 The study analyzes how 26 cities—hubs of finance, commerce, and culture— performed as centers of business, based on 66 variables in 10 indicator areas.

One telling indicator is Ease of Doing Business, which examined factors such as: Ease of starting a business, Ease of hiring, Rigidity of working hours, Ease of firing, Ease of entry, Flexibility of visa travel, Foreign embassies or consulates, Operational risk climate, and Workforce management risk. The leaders in the Ease

of Doing Business category were Hong Kong, Singapore, New York, and London. (See Figure.)

The study found that the biggest deter-minant for business investment was a combination of flexible labor policies, openness to the rest of the world, and the ease of starting and maintaining an enter-prise (which embraces the stability of a city’s fiscal and regulatory environment).

When looking at all the indicators in the study together, the five top-ranked cities are New York, Toronto, San Francisco, Stockholm, and Sydney. To explore the study in greater detail, visit www.pwc.com/cities.

View points

Each city’s score (here 191 to 54) is the sum of its rankings across variables. The city’s order from 26 to 1 is based on these scores.

Source: Partnership for New York City and PwC, Cities of Opportunity, 2011

High

Low

Medium

16

13

12

8

6

Hong Kong

Singapore

New York

London

Toronto

Sydney

Los Angeles

Chicago

San Francisco

Houston

Stockholm

Tokyo

Santiago

Berlin

Paris

Seoul

Abu Dhabi

Madrid

Mexico City

Istanbul

Johannesburg

Beijing

São Paulo

Mumbai

Moscow

Shanghai

21

20

19

18

17

15

14

12

10

9

7

5

4

3

2

1

22

23

24

25

26

178

163

143

162

166

156

119

188

191

152

159

121

140

102

119

76

117

54

97

60

138

90

74

87

61

154

1 Partnership for New York City and PwC, Cities of Opportunity, 2011.

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In the mid-1800s, prospectors flocked to the American West, hoping to find their fortune. Today, a similar phenomenon is occurring within US healthcare—compa-nies outside the industry view healthcare as one of the few bright spots in an otherwise sluggish economy.

What makes the industry so attractive to new entrants? The current health system is fragmented with inefficiencies, creating opportunities for technological and other process improvements. PwC’s Health Research Institute (HRI) identified three primary opportunities: (1) online health information services, (2) alternative sources of healthcare services, and (3) products and services aimed at the 18-24 year-old demographic segment.1

Some companies already have taken advantage of these opportunities, enter-ing the health industry in innovative ways. Consider that of the Fortune 50 organi-zations, nearly a quarter are traditional health industry companies. Almost another quarter have no direct involvement in the health industry. The remaining companies are part of a new lexicon coined by HRI: fixers, connectors, retailers, and imple-menters. (See Figure.)

Here’s how the new players will make their mark:

fixers attack the health system’s parts that are dysfunctional, bifurcated, and unsustainable. These companies search for opportunities to improve processes to reduce costs and waste. Fixers’ work can strengthen traditional health companies.

Connectors succeed by linking infor-mation and technology across the health system. These companies provide meaning-ful analysis and context so that clinicians and consumers can make better decisions about health behaviors.

retailers prosper in high-volume, standardized markets with low margins. Retailers use their deep customer relation-ships and ubiquitous access to serve new markets, such as primary care.

Implementers thrive on government spending programs, new regulations, and established industry standards. Implementers understand that the industry is converging, and they are able to work across traditional sectors toward the government’s aim to achieve a more integrated model.

The health industry gold rush

Strategy and growth

1 PwC Health Research Institute, The new gold rush, 2011.

76% Presence in health industry

Health industry involvement of Fortune 50 companies

52% New health industry categories

24% Traditional health

industry categories

24% No health industry

presence 22%

2%

14%

24%

14%

Source: US Bureau of Labor Statistics and PwC HRI analysis

Fixers Connectors Retailers Implementers

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View points

All in the family: Private companies voice their challenges and opportunities

Strategy and growth

Family businesses are a considerable portion of the US economy—estimates top out at 80 percent to 90 percent of all businesses.1 If you’re not among them, it’s likely you’re doing business with one or more family firms, regardless of the industry or region in which you operate.

Like any enterprise today—public, private, large, or small—family businesses of all sizes are navigating an environment that is anything but predictable. Yet beyond this universal challenge, family-owned busi-nesses face unique issues and opportunities, as revealed in a recent report by PwC.2

Not surprisingly, market conditions topped the list of external challenges (88 percent) for US family-owned businesses. Nearly one-third of family business leaders also said that government policy—tax policy in particular—poses a challenge. Seventy-six percent of surveyed executives said that the simplification of the rules governing corpo-rate taxes and/or the lessening of the tax burden is very important or quite important to them. For growth-oriented companies, taxes and regulatory issues around the globe are important as well and merit care-ful attention. Nineteen percent of survey respondents consider international tax regimes a top challenge. This percentage

may rise as family businesses increasingly look beyond the constrained US market to seek revenue opportunities in emerging and fast-growing markets abroad.

In addition, US family businesses cite competition as a top concern. That said, competition is less of a challenge now than the last time PwC conducted its Family Business Survey in 2007 (21 percent now compared with 34 percent then)—possibly because key competitors in the pre-crisis landscape no longer may be in business.

Internally, finding skilled personnel is the primary challenge, and the skills that family businesses prize often are in sup-port of new investment areas, such as IT, marketing, and sales. Other top internal challenges include sustaining sufficient capacity and meeting demand. Businesses that have been running lean these past couple of years may have low inventory levels, making it harder to ramp up quickly enough to keep pace with the business’s growth and expansion objectives.

At the same time, businesses face an ongoing need to control costs. One-off cost-containment efforts that companies made early in the recession now may have to be reinforced by more sustainable measures.

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52% Recruitment of skilled staff/labor shortage

88% Market conditions

32% Government policy

21% Competition

42% Cash flow/ controlling costs

37% Capacity/ meeting orders

Top family business challenges

One way businesses have begun doing this is by outsourcing back-office functions through the use of shared services centers.

The survey brings to light five key areas that family-owned businesses may want to focus on in meeting these challenges going forward: growth abroad, succession plan-ning, taxes, talent, and business model and operating structure. To that end, manage-ment teams are revisiting their agendas and are asking the following questions: Have we made the necessary big bets to set us on a course of sustained high performance over the next five years? What is our next growth engine? What changes do we need to make to achieve our business strategy? Will the big bets we’ve placed give us a competitive advantage that our peers can’t replicate? Have we sufficiently gauged our risk expo-sure and the best way to mitigate it?

Contemplating these questions and then formulating the answers can help family businesses navigate successfully into the next decade of the 21st century— and beyond.

1 J.H. Astrachan and M.C. Shanker, “Family Businesses’ Contribution to the U.S. Economy: A Closer Look,” Family Business Review, September 2003.

2 PwC, Family Business Survey 2010/11, “Choosing your next big bet: A US perspective,” 2011.

Source: PwC, Family Business Survey 2010/11, “Choosing your next big bet: A US perspective,” 2011

External forces

Internal forces

Designing your fiercest competitor Mastering change by making it real

Cover story



changed the mental model of the company: It would from now on be not only about what ran on the PC, but also the capabilities of the Internet and the tools (the Internet Explorer browser, for example) needed to fully exploit them. He was not going to let a new, fierce competitor take advantage of this technologi-cal and social trend—the Internet—and use it to beat his company.

At the time, Gates demonstrated vision, tenacity, and, ultimately, the ability to organize and execute—qualities that are even more important today. The world is more complex now than it was a decade ago. Things are changing faster because science is expanding and, most important, because feedback loops in technology, knowledge, and networks amplify learning.

Legend has it that in 1994, Bill Gates’ assistant, Steve Sonofsky, was visiting his alma mater, Cornell University. While there, he noted that Cornell was “taking full advantage of the fledgling Internet—email, course listings, international faculty collaborations, etc.—and fired off an email to his boss.”1 As a result, Gates became con-vinced that he needed to shift Microsoft’s focus toward the Internet—and fast. He sent out a long memo2 that stated that the Internet was taking off and that Microsoft would be a part of it.

Moreover, he wove this fundamental change into his story about the company. In particu-lar, he noted that the Internet was a natural extension of the desktop and part of the per-sonal computer domain. In other words, he

By John J. Sviokla and Adam J. Gutstein

John J. Sviokla is a Principal in PwC’s US Advisory practice where he serves as business leader for strategy and innovation. Principal Adam J. Gutstein is the management consulting leader in that practice.

So we won’t experience 100 years of progress in the 21st century— it will be more like 20,000 years of progress…. Ray Kurzweil

The speed of change is increasing at an alarming rate. Authors John J. Sviokla and Adam J. Gutstein argue that to prepare for accelerated change, companies need to look at five critical factors that they call the STEEP drivers: social, technological, environmental, economic, and political. Further, they maintain that management teams like yours can make these drivers of change “real” by asking leadership to “design a fiercest competitor” that could disrupt your industry. This manner of thinking and design sets the stage for actions management can take to benefit from, rather than be overwhelmed by, this rapidly changing environment.

1 http://www.cornell.edu/about/wired/.

2 This memo can be found at http://www.lettersofnote.com/2011/07/internet-tidal-wave.html.


For example, in 1990, the Human Genome Project was expected to last 15 years. However, because of advances in technology, the task was completed by 2003.3 Even the deepest experts did not understand how “the law of accelerating returns” (a phrase coined by Ray Kurzweil), which posits that “technological change is exponential,”4 works. They could not see how a combination of computer power, increased understanding, competitive access, and the knowledge network across

Figure 1: STEEP—A broad set of drivers with the potential to disrupt all industries the Steep drivers provide context In order to make sense of this accelerat-ing situation, we considered hundreds of trends, predictions, and forecasts, as well as their methods. We synthesized these forward-looking ideas into a model of five vital, interrelated drivers that we believe are the critical factors disrupting industries and recreating the lines of competition. (See Figure 1.) Understanding these core drivers and how they impact an organiza-tion is key to managing in this world of accelerating returns.

driver 1: SocialBy nature, people are social. Whether it is a friend who badmouths his car mechanic, or a distant cousin who helps get you that new job, the impact of social con-nections always has been the base upon

the Internet could make things happen much faster than expected.

In our view, in this world of faster change, it is time to examine the interlocking factors of social, technological, environmental, economic, and political change: STEEP drivers. Making these real is an exercise in creative destruction that involves a manage-ment team’s designing a fiercest competitor that could take advantage of these fast- moving trends for competitive gain.

3 http://www.ornl.gov/sci/techresources/Human_Genome/faq/faqs1.shtml.

4 http://www.kurzweilai.net/the-law-of-accelerating-returns.

Political

Social Technological

Environmental

Economic

STEEPDrivers


which commerce functions. Riding atop the Internet, social networks like Facebook and LinkedIn, or user-driven review sites like Yelp! and Rotten Tomatoes, have developed and taken hold at a phenomenal pace. As pundits have noted, by population, Facebook, created only eight years ago, would be the third-largest country in the world.5

Today, social networks not only offer extensive consumer information, but also provide an infrastructure capable of shaping society’s institutions—through self-organization, fundraising, and political action. In a business context, this means that social media is reshaping the micro context of a company’s brand and services, and the macro context of politics and regulation.

networks. This enables the firm to have a live, informed conversation with its audi-ence around the clock, throughout the year. If your firm does not perform this kind of monitoring and responsiveness, there may be conversations happening about you of which you are unaware, and lack of atten-tion can allow negative perceptions or even wrong claims to fester and grow.

Trust is a significant factor in this new world. Customers are more willing to trust a peer or customer review than a company’s claims about its product or service. Numerous websites and forums bear this out. However, today, a potent factor has been added to the equation. Social networks increase the ability of online shoppers to make use of multiple distribution channels and outlets, making

Affecting the micro domainRecently, a major airline discovered how the micro context of its brand could be af-fected by the impact of social networks. A well-known celebrity who had more than 1.4 million Twitter followers was using his account to complain about the service he received. He was updating his audience in real time about his feelings. Fortunately for the airline, representatives continually monitor social media in real time to discover what people are saying about the company. As a result, they were able to view conversa-tions and complaints and to respond almost immediately to the issue that this famous, disgruntled customer had with the airline.

Social media are completely integrated with the airline’s customer contact centers, from the phone, to the Web, to social

5 Dan Fletcher, “How Facebook Is Redefining Privacy,” May 20, 2010, at http://www.time.com/time/magazine/article/0,9171,1990798,00.html.


the influence of opinion that much more powerful. For example, a recent PwC study of more than 7,000 online users around the globe found that the vast majority— 86 percent—of survey respondents shop across at least two channels, and 25 percent are using four or five.6 In this process, they often turn to social media to help them make their choices.

How are companies taking advantage of these new social developments? The savvy ones are co-creating products and services with their customers. Sports apparel manu-facturer Nike offers one example. With the Nike+ system, a small, removable elec-tronic pod is a part of the insole of the shoe. This pod, which is the size of a quarter, sends results to a smart device and allows runners to track their own training, includ-ing distance and pace. This information is automatically uploaded to a website and runners can share their routes, routines, and comments easily and quickly. This

innovative product system, with its social overlay, differentiates the shoe.

Affecting the macro domainSince the commercialization of the Internet, the number of registered non-governmental organizations has grown from 1,250 to more than 45,000,7 and today, many of these ride atop the Internet. This means that the ability of special interest groups to organize, raise funds, and take action has become much easier. More than ever, businesses need to understand who is shaping the agenda for their companies and industries.

Part of the reason that social media has grown so quickly is the result of positive feedback. That is, the more that people use the medium, add reviews, or watch online videos, the more likely they are to find some-thing useful and come back. Coming back for something useful is not different. What is new is the permanency of the network and the increasing returns it creates in terms of

its value. In a network, positive feedback drives rapid adoption, a phenomenon that we expect to continue to grow.

driver 2: technologicalWe live in a wondrous and disconcerting age. Chances are your briefcase or pocket holds one of the latest waves of technologi-cal change. Based on cellular subscriptions, there are now more than 5 billion cell phones worldwide. Almost all new cars are connected to the Internet. The Internet of Things is adding everything from insulin pumps to light switches onto the grid. Big Data allow for the decoding of human ge-nomes and the ability of computers to beat humans at chess. And these examples are in no way comprehensive.8

Connecting everything means that firms increasingly need to compete not just on the quality of their physical value chain, but also on their ability to manage their information value chain. 7-Eleven® in Japan

1

2

3

4

5

6

7

01:10:29

09:22:31

12:08:32

16:43:0524:34:4330:23:1536:12:56

6 PwC, Customers take control: How the multi-channel shopper is changing the global retail landscape, December 2011.

7 http://www.apa.org/international/united-nations/publications.aspx.

8 The Internet of Things is “a new kind of network that will allow sensor-enabled physical objects—appliances in your home, products in a factory, cars in a city—to talk to one another, the same way people communicate over the Internet.” See Time’s “Best Inventions of 2008” at http://www.time.com/time/specials/packages/article/0,28804,1852747_1854195_1854158,00.html #ixzz1m0tJ9Ghn. “Big Data” refers to “massive amounts of data” that “are analyzed with massively parallel computers.” Read the full definition at http://www.pcmag.com/encyclopedia_term/0,2542,t=Big+Data&i=62849,00.asp.


has such great control over its informa-tion value chain that it tells store managers how to restock to meet the demand of the breakfast crowd, the lunch rush, the afternoon snacker, the evening shopper, and the late-night eater. The company is able to drive more sales because its information value chain allows it to slice the store in time increments, thereby creating more virtual square footage through information.

General Electric’s aircraft engine business has more information about the behavior of the engine on the wing that it tracks in its command center than the pilots have in the cockpit. By being able to track this information in real time, GE can provide customers with more analysis and preven-tative maintenance, thereby increasing up-time. Most important, by having a technological connection to the engine in flight, GE can sell “power by the hour” and provide airlines with a service whereby they pay only for those hours of engine use

they consume while GE worries about own-ing, providing, and maintaining the asset. We see a growing number of companies using this technology-based advantage to enhance their products, create new and better services, and retain customers.

driver 3: environmentalFrom a business perspective, eco-friendliness used to be primarily about reputation. That no longer is the case. Today, there is pressure on every industry to deal with power, water, and general environmental impact.

CEOs are recognizing that sustainability is as important to competitiveness as it is to image, permeating every aspect of an organization, from talent recruitment to innovation. In fact, according to our 14th Annual Global CEO Survey, 64 percent of respondents agree or strongly agree that an important part of their innovation strategy is to develop products or services that are environmentally friendly.

In short, in an increasingly competitive market, eco-friendliness is a differentiator, and more and more firms are recognizing the need to determine the implications of environmental matters for themselves, their customers, and their locations.

Consider MBA Polymers, for example, a company that has taken a potential eco-disaster—discarded post-consumer plastic—and turned it into a successful enterprise. When founder and plastics engineer Mike Biddle discovered that, for a variety of reasons, very little plastic was being recycled, he set out to find a solution. He developed a 30-step plastics recycling system that results in a product that requires less than one-tenth of the energy needed to make new plastic from crude oil. As a consequence of an innovative, eco-friendly solution, MBA Polymers has grown to include plants in China, Austria, and the United Kingdom, with plans to open additional plants in the future.


driver 4: economicEvidence points to the fact that the developing world is growing at a faster pace than the developed world. (See Figure 2.)

Most companies not only expect to grow in their home markets, but also intend to expand in other countries. Firms headquar-tered in the developed world want to grow in the developing world and vice versa. (See Figure 3.) Because there will be intensive competition both in developed as well as in emerging markets, companies need to understand how to manage a global supply base while meeting the needs of their local markets.

In our view, the need to grow will drive companies to manage their costs in a glob-ally efficient manner. This is evident in that almost every major company is establishing research and development centers around the globe and sourcing from an ever-wider base of global suppliers. For example, a large multi-level marketing company we worked with had standardized its core products and business concepts around the world. At the same time, it was important to meet the local variations in a number of markets. Therefore, the products that the company stocked and the business model it followed differed country by country. The Internet is an infrastructure that enables simultaneous standardization of some capabilities and localization of others. Again, this trend is accelerating as a combination of more open trade and the Internet enables a worldwide platform for commerce.

86%of more than 7,000 online users surveyed shop across at least two channels.

Other companies also have taken advantage of the demand for eco-friendly products and services. Some, like LIFESAVER® systems, deal with the needs of the here and now. LIFESAVER has developed a bottle-based (and therefore portable) water purifica-tion system that instantly creates potable water by filtering toxins and other impuri-ties and has filled a need that ranges from humanitarian efforts resulting from natural disasters to individuals traveling to locations

where drinkable water may not be readily available. Others, like Nanoholdings LLC, have their sights firmly fixed on the future. Nanoholdings is using cutting-edge nano-technology to approach energy generation in new, environmentally friendly ways.

Whether focusing on today or tomorrow, eco-friendly business is here to stay and sure to grow, offering significant opportu-nities for success through innovation.


Figure 3: Where will the growth come from?

0%

2%

4%

6%

8%

10%

China

India

BrazilTurkey

US

GermanyUK

France

Spain

driver 5: politicalWhile politics have always affected business, the current political environment is changing on many dimensions simultaneously. Three trends are worth noting. First is the rise of state-sponsored capitalism. This is not entirely a new phenomenon. One of the first shared stock corporations with limited liability—the East India Company (1600-1874)—was sponsored by the British Empire. Yet the scale and scope of some of these nationally backed firms are enormous.

Second is the complex relationship between government and business. Among CEOs surveyed in 2011, overregulation was seen as one of the top three threats to business growth prospects. However, “Nearly three-quarters of CEOs told us they would actively support new govern-ment policies that promote ‘good growth’ that is economically, socially, and environ-mentally sustainable.”9

Third, as we mentioned earlier, the rise of special interest groups has been dramatic. At least part of the reason that political institutions are more indecisive than they have been in the past is that the Internet has enabled greater numbers of people to self-organize around their cause. The more than 45,000 groups can exert many pres-sures on the powers that be.

Clearly, social, technological, environmen-tal, economic, and political drivers are moving in more accelerated and interactive ways than ever before.

9 PwC, 14th Annual Global CEO Survey, 2011.

Figure 2: GDP growth forecasts 2011

Source: PwC economic forecasts

Source: PwC, 14th Annual Global CEO Survey, 2011

*Central and Eastern Europe

33%

40%

29%

40%

25%

36%

32%

31%18%

0% 0% 0%50%

57%

59%

55%

47% 48%

55%

51%

48%

93% 89%

88%

87%

86%

100%

94%

92%

100% 100%

86%

85%

83%

86%

Companyheadquarters

Africa

Asia-Pacific

CEE*

Latin America

Middle East

North America

Western Europe

Region of operations

Africa

0% 100%

Asia Austral- asia

Eastern Europe

Latin America

Middle East

North America

Western Europe

73%

80%

67%

70%

64%

72%

77%

71%

73%

67%

75%

80%

80%

80%

75%

70%

73%

75%

71%

67%

69%


Designing your fiercest competitor: addressing the Steep drivers in your business

organization. A mental model is a picture of how the world actually works. It is based on data, relationships, and everyday experiences. While mental models are somewhat imprecise, subject to change, and inconsistent, they also are prone to creativity and/or flashes of insight.

Let’s take an example from the airline industry to illustrate how mental models work. Executives at an airline brought with them a mental model of the experi-ence of flying with their organization that was composed of elements such as sup-port, innovation, trust, transparency, and quality. However, stories about the flying experience on this airline were propagat-ing across social networks via social media, forever changing management’s notion of how traditional media work. Data on interactions with, for example, gate agents, flight attendants, and baggage handlers also affected the mental image, as did

While it is easy to consider the STEEP driv-ers in an abstract manner, it’s not as easy to confront them in concrete and immediate ways—that is, in ways that really can have an impact on your company. As any leader knows, organizational change depends on winning people’s minds and hearts. In order to begin a process of change, people need to be affected on both a rational and an emotional level. An abstract consider-ation of change that somehow is not very meaningful today will not get that job done. What’s needed is a technique that brings an immediacy to change and that leads to concrete action steps to deal with it. An exercise that facilitates designing your fiercest competitor is one such technique. (See Figure 4.)

Altering the mental modelEveryone who works for, buys from, does business or interacts in any way with a company forms a mental model of that


moments of truth, those profound experi-ences with a company—good or bad—that can remain with consumers for years.

Anticipating a fiercest competitor can have the same impact with regard to altering a mental model. It is critical that manage-ment teams learn how to design such a competitor in order to envision how new entities might enter their market and dis-rupt their business.

One way to do this is to ask management to imagine that they have been fired from their own firm and given access to capital and tal-ent. Most executives know their company’s weaknesses—the soft underbelly, if you will—and where the opportunities lie in a market for a firm that can move with a new model. This exercise helps senior executives

Figure 4: A fiercest competitor exercise

Alter your mental model Imagine scenarios involving disruptive, greenfield competitors

Apply insights gained

get out of their old mental habits and imag-ine new ways to compete.

Developing scenariosOnce this is accomplished, the fact base from the STEEP drivers relevant to the company’s industry can be used to imagine a couple of scenarios that jump-start a worrisome conversation. For example, if you are Apple, as a starting point, you might imagine what happens to your video business if Microsoft were to buy Netflix and do a distribution deal with Facebook. Or if you are a prop-erty and casualty insurance company, you might imagine what would happen if Google teamed up with an investment house that was willing to create a retail insurance prod-uct, and it used Google’s search expertise to help in underwriting and sales. Under these hypothetical circumstances, Google could

facilitate the creation of a new-age insurance firm. In conducting exercises of this sort, we often suggest that the fiercest competitor be imagined as a greenfield firm because it helps the senior team be unconstrained by current capabilities, organizational culture, performance standards, and norms.

As Clay Christensen has pointed out, compa-nies are often blind-sided by firms that take advantage of emerging trends and serve a lower price/underserved market.10 In short, we are asking executives to design disruptive competitors. We find that by doing this fierc-est competitor exercise, the STEEP drivers become real in a context senior management can understand and find motivating on a rational and an emotional level.

10 The Innovator’s Dilemma, Harvard Business School Press, 1997.


be building relationships. STEEP drivers uncover new complementors, channel players, and emerging third parties.

Third, and the most difficult, is that the senior team begins to have ideas for disrup-tive business designs. The problem for the CEO is that few organizations have the right talent, organizational structure, and funding to build a truly disruptive competi-tor—but it can be done.

Determining success—a caveatWhile some businesses are poised to extend their existing models to the next wave of change to meet the challenge of a fiercest competitor, success is neither easy nor assured. When the trends portend a disruptive competitor, we have found few—if any—companies that successfully created disruptive business models within their own organizations. The winners usually devise a way to “hot-house” the new business model.

Launching new products at Green Mountain Coffee®

Applying the insightsThe critical leadership question is this: What does one do with the insights that are generated from a fiercest competitor design exercise? The output usually comes in three forms. (See Figure 5.)

First, most executive teams immediately find places in their business where they need to accelerate existing initiatives or eliminate them so as to focus on the present and future rather than on the past. For example, after a fiercest competitor workshop at one major insurance company, management chose the former approach. They amped up their direct-to-consumer strategy because they saw its weakness in that channel much more clearly. A differ-ent firm saw that it needed to create a new product to blunt a possible strategic weak-ness if and when inflation returns.

Second, senior teams pursue partnerships with outside firms with which they should

At Green Mountain Coffee Roasters, anticipating its fiercest competitor means applying innovation energy at all levels of the organization. The ultimate goal? To generate a revenue stream that grows by 15 percent per year through the introduc-tion of new hit products.

However, according to Kevin Hartley, Vice President of Strategy at Green Mountain, this is easier said than done. “While critical to the launching of hit products, innovation is not for wimps. It’s ugly, and in large or-ganizations, it collides with the status quo.” What’s needed, he says, is “an understand-ing of the dynamics of the organization,

coupled with an infrastructure that enables innovation and, consequently, the launch-ing of hit products.” By bringing together quality coffee and a unique single-serve delivery system, the Keurig K-Cup single-serve brewer is a home run for Green Mountain and is today, as Hartley describes it, “the fastest-growing consumer product in the US, except for the iPad.”

Success, however, doesn’t just happen. It requires infrastructures suitable to the launching of global hit products, including individuals who are drivers of innovation, suitable gatekeepers, and assets that are aligned with opportunities.

Accelerate or eliminate existing initiatives

Pursue new partnerships

Develop disruptive business designs

Figure 5: Creating a disruptive business model


Hartley refers to individuals who drive innovation as producers. “A producer,” he says, “takes an idea and rams it through until it exists in the physical world. Produc-ers are change agents who never give up. Rather, they take decision makers through the processes needed to make great new products real. They lay the groundwork for infrastructures that enable creation.”

When it comes to launching new hit prod-ucts, every large organization has internal adjudicators or gatekeepers who can prevent an idea from reaching its potential. “The solution,” says Hartley, “is to use world-class adjudicators, preferably from outside the organization, who are knowledgeable about

Finally, when launching a global hit product, it’s important that assets equal opportuni-ties. Says Hartley, “If you have a vision of a global hit product, your assets—human and financial—must be appropriately sized to the opportunity. If you’re not going to do that, you should just forget about innovation.”

The team at Green Mountain Coffee practices what they preach. But they are not resting on their laurels. According to Hartley, they intend to apply these principles to achieving their ultimate objective: “We want to be the world’s largest single-serve beverage company,” he says. “And new global hit products will help us get there.”

While some businesses are poised to extend their existing models to the next wave of change to meet the challenge of a fiercest competitor, success is neither easy nor assured.

One way is to establish disruptive innova-tions as separate organizational entities with their own funding and leadership and with a plan to integrate them after they grow to scale. If there is a relationship to the parent, it is usually arm’s length, at least until the division grows large enough to stand on its own. At that time, it is reintegrated. This is how IBM entered the personal computer business in the 1980s, and it was how W.W. Grainger created a market-leading online capability, Grainger.com, in the mid 1990s. Bottom line: The more disruptive the business model is to the parent company, the greater “distance” it needs from the core.

There are, however, always the exceptions that prove the rule. Though it’s not the norm, with strong leadership and proper guidance, disruptive business models can be incubated closer to home. Cases in point: Schwab Online and Green Mountain Coffee. Schwab Online was created within the

overall Schwab structure and eventually became the core of the new Schwab. Likewise, Green Mountain Coffee has been able to incubate radical inventions within its core business. (See the sidebar below.)

deriving valueWhile workshops can be intellectually stimulating and encourage teamwork, if value is not the result, the entire exercise is in vain. If you are going to extract eco-nomic value from the fiercest competitor design effort, you must look to accelerate key internal initiatives, constrain others,

create new partnerships, and, in the case of truly fierce designs, avoid being seduced by the hope that you can incubate this new model within your own firm without appropriate distance between the old and the new. History shows that successful companies will kill the new idea with kind-ness if they are kept too close. Like a rogue relative, a new idea needs time to develop and mature before returning to the fold. If your organization lacks the courage to give new ideas a chance to thrive and grow, the market will give birth to your worst night-mare. If it has that courage and exploits it to the fullest, you will succeed.

the ideas they are judging. The key is to avoid the tyranny of the check mark—the naysayers who insist, ‘Yeah, we tried that, it didn’t work.’” Often, when new products founder, the blame rests with the internal adjudicators. Because they’re judging new products, they may lack adequate knowl-edge of the customer or the market. Big ideas can get so diluted prior to execution that they barely resemble the original con-cept. As Hartley points out, “If you want to set an infrastructure for launching hit prod-ucts, the purity and power of the idea has to be exposed to the consumer.” Anything less will result in failure.


Cybersecurity The new business priority

In today’s global, digital world, data rule. Safeguarding intellectual property, financial information, and your company’s reputation is a crucial part of business strategy. Yet with the number of threats and the sophistication of attacks increasing, it’s a formidable challenge. PwC’s US Security Leader Gary Loveland and Security Principal Mark Lobel reveal how company leaders can protect—and strengthen—the business with the right approach to information security.

By Gary Loveland and Mark Lobel

Gary Loveland is the US Leader and Mark Lobel is Principal in PwC’s Security practice. They also oversee the annual Global State of Information Security Survey, which PwC has conducted for 14 years. For a detailed look at the survey, visit www.pwc.com/giss2012.

Managing risk


Information security probably isn’t some-thing that gets a lot of executive attention. It’s the CIO’s job or the responsibility of his lieutenants. Yet every so often when scan-ning the headlines, news about the latest high-profile cyberattacks elevates your blood pressure as you wonder: Could that happen to us? What would be the impact on our business? How would we respond to customers and shareholders?

But then it’s often back to the more press-ing issues of the day, and the state of your company’s information security recedes to the background. You won’t likely give it another thought—until there’s an incident. Then it’s damage-control mode, as the company deals with stolen customer data, disclosure of confidential financial informa-tion, a disabled Web storefront, or worse.

This reactive approach is all too common, even though the question is not if a company will suffer an incident but when. In the annual PwC, CIO, and CSO survey of more than 9,600 global executives, 41 percent of US respondents had experienced one or more security incidents during the past year.1 And that number is rising. Respon-dents reported financial losses, intellectual property theft, reputational damage, fraud, and legal exposure, among other effects. (See Figure 1.) With such high stakes, most would agree that information security deserves full attention at the highest levels of the company.

Figure 1: US business impact of security incidents

Financial losses

Intellectual property theft

Brand/reputation compromised

Fraud

Legal exposure/lawsuit

Loss of shareholder value

Extortion

37.5%

31.8%

31.2%

15.8%

12.2%

11.3%

7.1%

Source: PwC, CIO, and CSO 2012 Global State of Information Security Survey

1 PwC, CIO, and CSO 2012 Global State of Information Security Survey.


Government leaders, at least, are taking notice: Lawmakers, the Securities and Exchange Commission (SEC), and the Administration have been highlighting increased security risks and the need for both the private and public sectors to step up their security game. In October 2011, the SEC issued guidance on the disclosure of cybersecurity risks and incidents.2 While the guidance didn’t propose new require-ments, it reminded company leaders—and boards of directors—of their obligations under current rules. That same month, in the aftermath of disclosures by WikiLeaks, President Obama issued an Executive Order calling for measures to enhance national se-curity in order to reduce the risk of a similar breach in the future.3 These developments follow ongoing efforts to move cybersecurity legislation through Congress and into law.

perception versus realityBack in the corporate world, is cyberse-curity still considered a purely technical matter? Or do businesses understand that

it is the lynchpin for safeguarding their most precious assets—intellectual prop-erty, customer information, financial data, employee records, and much more?

It depends upon whom you ask. The PwC, CIO, and CSO survey revealed that executives may say and believe one thing, but the data and expert analysis indicate that they do an-other. First, the survey asked, How confident are you that your organization’s information security activities are effective? Seventy-two percent of respondents answered that they were very confident or somewhat confident.4 However, when executives were asked to characterize their company’s approach to in-formation security, identifying whether they possess an information security strategy and have proactively implemented it, the positive results took a nosedive.

Just 43 percent of respondents self-identified as Front-runners; that is, those who felt they have an effective information security strategy in place and are proactive

in executing the plan. Those who saw themselves as Strategists (27 percent) felt they have the big picture right but fall down on execution, while Tacticians (15 percent) said they are better at getting things done than in defining a broader strategy. Finally, the Firefighters (14 percent globally but 22 percent in the US) admitted to lacking a strategy and to being reactive regarding information security.5

But when it came time to let the data do the talking, the companies that were “walking the walk” and not merely “talking the talk” were significantly fewer: just 13 percent of respondents. (See Figure 2.) These leading companies not only have an information security strategy in place, but they demon-strate a number of other leading practices, including having a high-level security chief, regularly measuring and reviewing the effectiveness of their policies and proce-dures each year, and possessing a deep understanding of the types of security events that have occurred in their organizations.


2 http://sec.gov/divisions/corpfin/guidance/cfguidance-topic2.htm.

3 http://www.whitehouse.gov/the-press-office/2011/10/07/fact-sheet-safeguarding-us-governments-classified-information-and-networ.


5 Numbers reported do not total up to 100 due to rounding.

All companies: 100%

True Leaders:13%

Confident:72%

Front-runners:43%

Figure 2: Differing views of information security effectiveness and leadership

The majority of executives in the survey—72%—reported being very confident or somewhat confident that their organization’s information security activities were effective. Yet just 43% described themselves as Front-runners, meaning they had a strategy in place and proactively executed it. But when we analyzed their information security practices, only 13% of companies could be considered True Leaders.


14%of executives surveyed admitted to lacking a strategy and being reactive when it came to information security.

Figure 3: Primary obstacles to information security, by senior executive

27%23%29%

Insufficient funding for capital expenditures

25%27%25%

Leadership – CEO

23%19%25%

Absence or shortage of in-house technical expertise

23%16%23%

Insufficient funding for operating expenditures

18%25%25%

Lack of an effective information security strategy

17%25%30%

Lack of an actionable vision or understanding

14%23%18%

Leadership – CIO

13%14%19%

Poorly integrated or overly complex information/IT systems

12%22%16%

Leadership – Security chief

CEO

CFO

CIO

Addressing information security can be especially challenging because execu-tives do not always agree about company issues and goals. In the survey, we asked respondents what the greatest obstacles were to improving their organi-zation’s information security. While the number one response predictably was about resources—insufficient funding for capital expenditures—the answers often changed when we looked more specifically at who was answering. CEOs agreed that lack of capital funding was the problem, but CFOs indicated a lack of leadership from the CEO was the reason. Meanwhile, CIOs and secu-rity executives pointed to a lack of actionable vision or understanding within the organization.

Barriers to effective cybersecurity



four growing cyberthreatsThe companies in this top tier—whom we refer to as security leaders—understand that they are up against different types of cyberthreats. There essentially are four types of attacks, each of which has a differ-ent motive. It’s helpful to think of these as storm waves, swirling around your busi-ness. At any given time, it is impossible to know which wave will hit and what type of damage it will wreak.

The first and oldest wave is nuisance hack-ing, in which there is little material impact to the company. A classic example is hack-ers defacing your company’s website. More serious and widespread is the second wave, which is hacking for financial gain.

As business has migrated to the digital world, criminals have, too. What has emerged is a sophisticated criminal ecosys-tem that has matured to the point that it functions much like any business—manage-ment structure, quality control, offshoring, and so on. This type of hacking now goes beyond blindly stealing customer credit card information or employee passwords. For example, hackers might target a company’s financial function in order to obtain its earnings report before it is publicly released. With such advance knowledge, they can profit by acquiring or dumping stock.

Protecting the business from cybercrime is one thing, but companies also must worry about a new type of risk—the advanced per-sistent threat. If you think the term sounds

of US executives surveyed had experienced one or more security incidents in the past year.41%


like it’s out of a spy movie, you’re not far off. This type of hacking is predominantly about stealing intellectual property and typically is associated with state-sponsored espio-nage. The motives go beyond financial gain. Experts may quibble about the specifics of this type of attack and whether it always has involved use of advanced techniques, but this is a serious and growing threat. It is not an understatement to say that what’s at risk is not only your intellectual property but possibly national security.

The high-profile Stuxnet worm case dem-onstrates how specialized and sophisticated these attacks can be. The Stuxnet worm that was discovered in 2010 was designed to infil-trate industrial control systems, such as those that manage water or power plants. But it

wasn’t an infrastructure system that was hit; hackers infiltrated and potentially sabotaged the Iranian systems that manage uranium. As the chilling details emerge, what’s notewor-thy is that the attack was planned (and the worm developed and placed) as many as four years ahead of the incident.

This foresight echoes a trend we have seen in our work with companies such as defense contractors. When they announce plans to acquire another company, perpetrators go after the potential acquisition. Their hope is to embed malicious software on the systems of the acquisition target so that when the companies ultimately are integrated, hack-ers will have access to the parent company’s systems—even if it means biding time for 18 to 24 months or longer.

And it’s not only specialized industries like defense that are at risk for advanced persistent threats. We have seen consider-able activity in the financial services and technology industries. In some cases, the perpetrators infiltrate a bank or service provider in order to get access to the orga-nization’s customers’ systems.

Finally, there’s one more type of threat that is on the rise: hacktivism. WikiLeaks immediately comes to mind, but, for the private sector, think of this as the digital equivalent to Occupy Wall Street. The goal of perpetrators is to change or create a pub-lic perception of your brand. For example, hackers might obtain sensitive information and disclose it to the public.


Keeping pace with new technologiesNot only do companies face a myriad of threats, their exposure grows as they invest in technologies like mobile, social, and cloud. In the survey, only a minority of US companies had strategies in place to protect against the risks that these new technolo-gies bring.6 (See Figure 4.)

Mobile, in particular, challenges the busi-ness because suddenly corporate data can be widely accessed outside of the enter-prise. And employees often don’t realize the risks being introduced when sharing, sending, or receiving corporate information on a smartphone or tablet, especially if it is a personal device.

Likewise, with social media, where the line between personal and professional can be-come blurry, employees inadvertently may be disclosing sensitive information. Called data leakage, it can happen when employ-ees share seemingly innocuous details, such as the airport they are in or the coffee shop they are frequenting every morning. Others within their social networks can use these clues, along with profile information about their jobs (bankruptcy attorney, M&A specialist), to ferret out potentially sensi-tive information, such as the identity of a financially troubled company or a potential acquisition target.

Figure 4: Companies addressing security risks from new technologies

Strategies for strengthening the businessWith so many risks, business leaders may be unsure of where to focus. In our experience, it is crucial to elevate the role of information security in the organization and emphasize the fact that it is not just a technology func-tion. As a make-or-break business issue, it requires a leader who reports directly to a senior executive. The title of the person—chief security officer, chief information security officer, security director—isn’t what matters. Instead, it’s the ability of that indi-vidual to bring security issues to the C-suite and help the management team think and talk about how security affects every other business decision.

Effective security leaders consistently dem-onstrate the linkages between security and the company’s goals. They remind the rest of the management team that security is a strategic issue. In the survey, the Front-runner group emphasized this approach by citing client requirements as the driving force behind the company’s information security investments. The other respondents pointed to legal and regulatory requirements as the main justifi-cation for information security spending in their organizations.

21.1%Cloud security strategy

33.7%Mobile device security strategy

37.4%Security strategy for employee use of personal devices

31.5%Social media security strategy




An organization that embraces this mindset, for example, might engage the security lead-er and the sales leader, together, to consider how better information security can help close or speed sales. They might determine that having well-documented information security controls, processes, or certifications in place enables them to anticipate and ad-dress customer concerns immediately when or before the issue first is raised.

Some companies we work with find it ef-fective to have security leaders embedded within each business unit. These individuals report to line-of-business heads and work directly with them to evaluate how security can support each group’s business goals.

where’s the data?Companies that understand the value that security brings to the business also ensure that they have a comprehensive strategy in place—and that they have the processes and procedures to back up their vision. The guiding principles for strategy are driven, in large part, by their data. Companies will want to ask a seemingly simple question: What’s our most sensitive data?

Surprisingly, many companies can’t begin to answer that question. Company leaders will need to identify their most sensitive data. They’ll consider business assets like intellectual property, as well as information

that they have a fiduciary responsibility to protect, including customer, business partner, or employee data.

As companies undertake this foundational exercise, they will ask: What data do we have? Where are they located? What laws and regulations apply to them? What controls do we have around them? Are we sending data to third parties? If so, is it being handled securely? There’s much work to be done here: In the survey, only 29 percent of companies have an accurate inventory of data—a decline of 10 percent from just two years ago.

What concerns security experts most?

Like the very nature of business itself, information security challenges are evolving. This topic came up continually as we discussed the survey findings with companies in all fields. What are the security chiefs at leading organizations most worried about? Here are some of the top concerns:

Mobile devices The power of employee and customer mobile devices makes companies increasingly vulnerable. Consider just a few scary possibilities: Hackers mobilizing smartphone users to bring down a company network by organizing a “computational flash mob.” Or banking apps available from popular online stores that are not affiliated with the banks they claim to represent; instead, they are designed to steal data. What is the best thing companies can do? Come to terms with the fact that mobile is here to stay and address it head-on in your strategy and policies. Begin thinking of mobile devices not as phones or adjunct devices but on par with laptop computers that have their own powerful peer-to-peer networks.

Increasing sophistication of the attacks Whatever you call these attacks—and security experts have been known to go round and round about just what constitutes an advanced persistent threat and whether the term is useful—some perpetrators are changing the rules of the game. They are locking on a specific target and formulating long-range plans to accomplish their goals. In the last year, we have seen several industry-leading companies in the technology and financial services industries that have been victimized. If it could happen to them, it could happen to anyone.

proposed legislation Experts seem to agree that it’s only a matter of time before information security is mandated by law. Over the past few years, various incarnations of bills have been proposed. While security chiefs understand the scrutiny, they have concerns about security becoming a compliance burden. They worry that this will cause businesses to lose sight of what really matters: focusing on their strategy and thinking about next threats.


For companies that have grown through mergers and acquisitions, there’s the additional hurdle of getting a handle on disparate data sources—not to mention different policies, processes, and systems that were inherited with each merger or acquisition.

In the process of evaluating what’s cur-rently in place and where the company’s attention needs better focus, some organi-zations find it helpful to conduct an outside assessment of their current operations. Often, when companies get a glimpse into what really is going on, they are surprised. They discover that the biggest problems may be caused by their employees.

For example, companies may find that workers lack even a basic awareness of the information security risks to which em - ployees are subjecting the business when they don’t follow policy—for example, they fail to change default passwords or they leave

their computers on when they go home. Some companies bring in outside security ex-perts to conduct an assessment, particularly if an organization wants to test the security of its networks. This so-called ethical hacking attempts to penetrate a company’s network to pinpoint vulnerabilities.

In our work as security specialists, the trend we’ve observed is that companies have become much better about protecting the organization from the outside. But once a perpetrator is able to gain access to an in-ternal network—whether by walking in the door and plugging into a network jack or via malware that is dormant on a USB drive that an employee picks up in the parking lot and plugs into his networked computer—we always have been able to gain levels of unauthorized access.

A security assessment also might reveal that the company has not kept up with a changing IT environment, especially one

in which business units or employees have independently added their own devices or applications to the mix. All too often, businesses maintain the status quo but don’t adequately address how these latest technologies and new ways of working put them at risk.

testing, testing, testingRecognizing that organizations are dynamic—and that criminals always are innovating—it’s especially important for companies to consistently monitor and test what they have in place. In the survey, the companies that we defined as True Lead-ers measure and review the effectiveness of their security policies and procedures annually (compared with just 54 percent of other respondents). These organiza-tions also know where they are vulnerable and need to shore up their defenses. This is significant because just a few years ago, almost half of the survey’s respondents couldn’t answer the most basic questions

100%

50%of the companies we defined as security leaders measure and review the effectiveness of their security policies and procedures annually.

fewer information security incidents were experienced by the security leaders, compared with the rest of the survey respondents.


they need to disclose an event. This issue is gaining more attention in light of the SEC’s recent guidance on the matter, remind-ing public companies that the following impacts must be included: remediation costs to customers or partners, increased information security investments required to remedy the situation, lost revenues due to breach, litigation resulting from breach, and reputational damage affecting customer or investor confidence. Company management and boards will want to consider the balancing act required to fulfill these responsibilities to investors and cus-tomers while ensuring that leadership does not disclose information that would make the company further vulnerable to hackers.

follow the leadersLeading companies today are rethink-ing the role of information security in their organizations. They realize that in a digital world, cybersecurity is the key to safeguarding their most precious

assets—intellectual property, customer information, financial data, and employee records, among others. But far more than a defensive measure, companies also know that cybersecurity can better position their organization with business partners, cus-tomers, investors, and other stakeholders.

Additionally, a sustained approach to security enables companies to better take advantage of newer technologies—mo-bile, social media, and cloud—that are driving business growth for many organi-zations. Company executives are leading the charge, working across the business to assess the current environment, define their most sensitive data, assign account-ability, devise a strategy, and measure their progress. With strong leadership and a comprehensive approach that continually links information security back to business strategy, top managers will better position their organizations for success.

about the nature of security-related breaches; now approximately 80 percent or more of respondents can provide specific information about the frequency, type, and source of security breaches their organiza-tions faced. And they are seeing results: The leaders reported half as many informa-tion security incidents per year, compared with the rest of survey respondents.

Companies that are proactive about infor-mation security also consider the impact of breaches—especially given that these events are on the rise. Of those, risks associated with customers, partners, or suppliers are a major concern, having nearly doubled in the past two years. This situation is compound-ed by the fact that given recent economic uncertainty, security has not been a priority. The levels of investment, awareness, and training all have declined.

In thinking about potential breaches, organizations will determine to whom


Beyond the BRICSHow to succeed in emerging markets (by really trying)

Strategy and growth


By John Maxwell

John Maxwell is the Global Leader in PwC’s Retail and Consumer practice.

1 “Emerging Markets Take Centre Stage: A Dramatic Shift in Purchasing Power,” Business Monitor International, February 4, 2010.

2 PwC, Central banks: After the storm, 2010.

US businesses with key operations beyond the mature markets of North America and Europe are most optimistic about growth. Of those with operations in emerging markets, about three- quarters expect businesses in those regions to expand, according to PwC’s 15th Annual Global CEO Survey. The world is turning to the East, and consumer goods companies—just like other sectors that ultimately depend on purchasing power and attractive demographics— are paying attention.

It’s been 10 years now since Goldman Sachs’ Jim O’Neill first coined the acronym “BRICs” in his November 2001 research paper, “The World Needs Better Economic BRICs.” O’Neill’s forecast of the importance of these markets was prescient. For example, even after their advances over the past decade, China, India, and Russia are predicted to triple spending power by 2018, and Brazil is not far behind, according to a recent report by Business Monitor International.1

While South Africa, by most accounts, has become a fifth member of the BRICS (signified by the capital “S”), these countries no longer sufficiently represent the rise of emerging markets. Global gross domestic product (GDP), factoring in purchasing power parity, now has reached about a 50/50 split between the developed economies and emerging economies. In fact, for the first time since the dawn of the Industrial Age, the global economic engine is being powered by Southern Hemisphere nations.2

Moreover, in the aftermath of the financial crisis and subsequent Great Recession, the emerging markets as a whole—not the world’s debt-ridden developed markets— have been the most resilient in the face of global distress. As Chief Economist and Leader of PwC’s Emerging Markets practice Harry Broadman puts it, “Going through the financial crisis, the most resilient economies—measured by GDP or trade volumes—have been the emerging markets.”

Broadman made this comment at PwC’s annual Global Retail and Consumer Leadership Conference held recently in New York. He moderated the session “A BRIC and Beyond,” which examined the notion that, while the BRICS still serve as a proxy of sorts for any emerging markets discussion, there is much going on beyond the BRICS that business leaders should know about.

Besides Broadman, the panel included Michael Tangney, vice chairman of Colgate-Palmolive; Ricardo Neves, PwC’s retail and consumer leader in Brazil; John Wilkinson, PwC’s retail and consumer leader in South Africa; and Adnan Akan, PwC’s retail and consumer leader in Turkey. In the following, we present highlights of their discussion.

John Maxwell Global Retail and Consumer Leader PricewaterhouseCoopers LLP


The EAGLEs are defined as 10 emerging and growth-leading economies

When we speak of emerging markets, just what countries are we talking about? It depends on whom you ask: The FTSE Group identifies 22 emerging markets, split between “advanced” and “secondary.” Standard & Poor’s, which rates the sov-ereign debt of 126 different countries, classifies 19 of them as emerging markets. Perhaps not surprisingly, the ubiquitous success of the term BRICS has spawned a whole new set of alphabet-soup-like terms for different groupings of emerging markets. One is the EAGLEs, defined as the 10 emerging and growth-leading economies. (See Figure.) Others are the 12 countries of the Big Emerging Markets (BEM), and the rather unwieldy CIVETS, which includes Colombia, Indonesia, Vietnam, Egypt, Turkey, and South Africa.

No matter how they are sliced and diced, most emerging markets will continue to

enjoy growth that dwarfs that of the devel-oped markets. The International Monetary Fund and the World Bank project that, in 2025, the pace of growth in emerging markets still will be double that of devel-oped markets.

What surprises many, though, is the precise nature of this growth. Much of it will result from what’s called South-South commerce3 as opposed to the more familiar North-South commerce, which is advanced countries investing in developing countries to make products cheaply and then export-ing predominantly to developed countries. “There is a tremendous amount of com-merce that is taking place among emerging markets,” said Broadman. “In 1970, South-South trade was about seven percent of world trade. Today, it is 20 percent of world trade.” That means that the usual suspects looking for market share in emerging

Something funny happened to developing markets as they continued to “emerge”: They became the engines of global eco-nomic growth. India, China, Brazil, and many other countries are undergoing the kind of economic transformation that South Korea, Japan, and the nations of Europe experienced during the post-World War II boom. Economic progress in emerg-ing markets is happening at an accelerated pace due partly to advances in technol-ogy, sound economic policymaking, and reduction in poverty as a result of health, education, and other social reforms.

In fact, from 1996 to 2010, emerging markets countries grew at more than twice the rate of developed countries—about five percent versus two percent annual GDP growth, respectively. Even more impressive is that, recently, income disparity between certain emerging markets and developed markets is declining rapidly.

3 Commerce among emerging markets.


The EAGLEs are defined as 10 emerging and growth-leading economies

Source: BBVA

B R A Z I LC H I N A

E G Y P TI N D I A

I N D O N E S I AM E X I C O

R U S S I AS O U T H K O R E A

T A I W A NT U R K E Y

“There is a tremendous amount of commerce that is taking place among emerging markets,” said Broadman. “In 1970, South-South trade was about seven percent of world trade. Today, it is 20 percent of world trade.”

markets—multinationals from developed countries—have an additional source of competition in successful emerging markets brands.

This sea change in the structure of the global economy has ushered in a new era of South-South capital investment as well. In the past, the transparency and liquidity of the US capital market proved an enormously strong lure for many global companies, no matter where they were based. While the US still is one of the globe’s largest recipients of foreign direct investment, the growth of South-South foreign direct investment flows has taken off. “If you look at where foreign direct investment out of emerging markets goes—the multina-tional corporations from these emerging markets—one-third of their foreign direct investment is taking place in other emerging markets,” according to Broadman.


how the emerging markets were—and still can be—wonThe companies that thrive in emerging markets often tend to be the pioneers. Colgate, for example, can lay claim to a century-long legacy of overseas opera-tions—not to mention customers in 200 countries today.

When Colgate vice chairman Mike Tangney was asked about the company’s long-time success in Latin America and Asia, he explained that when he arrived in Colombia in the late 1970s after time spent at several other international Colgate locations, he found a comparably strong Colgate operation in the city of Cali. Tangney quizzed several “in-the-trenches” managers in Colombia, trying to under-stand their secret. They all told him the same thing: Virtually the entire manage-ment team had been in place for nearly two decades, getting to know the lay of the land. Thus, whenever asked to account for Colgate’s success in perceived risky environments, Tangney always responds: “Consistency of management, a willingness to take the ups and downs, persistence, and long-term vision.”

John Wilkinson cited the Shoprite Group of Companies, Africa’s largest food retailer, as another company bold enough to look to emerging markets ahead of other compa-nies. Today, the company has more than 1,500 stores in 16 countries across Africa. “Shoprite is very interesting because they are seen as pioneers in Africa,” Wilkinson said. “It’s exciting to talk to their management about the challenges and opportunities in Africa.”

But for companies with no presence or just nascent operations in emerging markets, what good is talk of being a corporate pioneer in 2012 when consumers all over the world use mobile devices; more than a billion people can access the Internet; and millions enter the ranks of the middle class every year? The irony is that despite an ever-smaller and more interconnected world, there still are many opportunities to break new ground. Three key C-suite attri-butes can help ease the transition: a “taste for risk,” in Tangney’s words; a willingness to disregard conventional wisdom about emerging markets; and a commitment to being there for the long haul.

attribute one: a taste for riskAccording to Tangney, there is a value proposition paradox at work in some African countries that many companies without experience there can’t appreciate. While some consumer packaged goods companies are reluctant to build businesses in relatively poor countries, assuming that they can sell products only very inexpensively, Tangney said that, on the contrary, some of these consumers are willing to pay a premium.

“Even though consumers may have minimal purchasing power, the value of what Colgate sells to them is greater than the value in developed markets,” Tangney said. “When I go into homes in Soweto, South Africa, I ask the question, ‘Why do you buy what you buy?’ And they say: ‘The health of my fam-ily is important. I am not going to buy the cheapest product.’ We can, in fact, command a premium price.” But companies must be prepared for poor quarters, poor years, and just about everything in between. “Over the years, we’ve dealt with chaos, civil insur-rection, financial disruption,” Tangney said. “If you’re looking for a sure thing, emerging markets are not the way to go. You need a taste for risk and a tolerance for ambiguity.”


Unilever is another consumer products company embracing the opportunities in emerging markets while being aware of the risks. Shifting much of its business to new markets will mean a lot of changes, as Unilever CEO Paul Polman explained in an interview for PwC’s 14th Annual Global CEO Survey, published last year: “Within 10 years, 70 percent of our business will come from the Far East,” Polman said. “That shift eastward has tremendous implications for our company’s structure and culture. The values at the heart of our company certainly won’t change, but our culture and business model will need to evolve to reflect a chang-ing customer demographic.”

Other consumer goods CEOs clearly share the same view: According to the survey, 57 percent anticipate that they’ll need to make strategic changes to capitalize on the increasing prosperity of consumers in emerging markets. One of these CEOs is Bob McDonald, Chairman of the Board, President and CEO of US-based Procter & Gamble (P&G). He explained to PwC just how com-mitted P&G is to emerging markets, despite the risks. He told us: “We currently have 20 new factories under construction around the world—19 in developing markets and one in a developed market, which is the US.”4

Companies with the DNA to stake a claim today in emerging markets may find large swaths of them still open for penetration. Brazil, for example, is a huge economic success story, but its relative insularity still scares off some foreign companies. “Brazil has been an economy that, in some ways, has been very closed, even when compared with other emerging markets,” said panel member Ricardo Neves. “Historically, we have always been bureaucratic and put a lot of fences around the internal mar-kets.” But those regulations will inevitably loosen, because as Neves said, “There’s a lot of discussion about lower prices and better-controlled inflation if we were more open to competition.” The global consumer

goods companies and retailers that are first-movers in Brazil will have an enor-mous advantage.

According to Adnan Akan, opportunities abound in Turkey as well, particularly for large retailers. About 60 percent of the retail market is classified as “traditional,” compared with just 20 percent for Western Europe. That leaves plenty of consumers hungry for the conveniences of modern retail. And for consumer goods companies, there’s a lesson in what Napoleon Bonaparte once said: “If the world were just one coun-try, Istanbul would be its capital.” Turkey’s straddling of Europe and Asia gives it a major advantage as a production center.

The panel included (from left) Harry Broadman, Michael Tangney, Ricardo Neves, John Wilkinson, and Adnan Akan.

4 PwC, 14th Annual Global CEO Survey, 2011.


attribute two: leave conventional wisdom at the border

system,” he said. “But now you see develop-ment all over the continent and investments being made in countries geographically removed from South Africa. There is a lot of interest in Africa now so the various countries are trying to promote themselves.” The ways they are doing that are as varied as the 50 or so different countries of Africa. For example, according to Wilkinson, Mauritius has taken steps to make it much easier for global companies to enter the country.

Another common assumption about many African countries is that corruption and instability will sink any efforts for success. But the reality, according to Wilkinson, is that while foreign investors need to perform detailed analysis of any country they consider, the operating environment

It’s not just a tendency to shy away from risk that leaves plenty of opportuni-ties on the table in emerging markets. Assumptions about how to do business in various emerging markets unnecessarily shackle companies.

For example, for global companies enter-ing Africa, it’s been conventional wisdom that the path to success starts in South Africa, moves north through Namibia, Botswana, and Zambia, and then swerves east to Tanzania or perhaps west to Nigeria and Ghana. According to panel member Wilkinson, however, the days of any one template for investment in Africa are long gone. “South Africa has been in that fortunate position with the most developed economy, infrastructure, and banking


is much improved. “Africa is not a country; it’s a continent,” Wilkinson said. “So there are different market sizes, income levels, languages, and cultures. But as a whole, Africa is booming, political risk has less-ened, and the operating environment has improved in many countries.”

For Brazil, a number of companies still remember the instability and runaway infla-tion of the 1990s, dynamics that, back then, were synonymous with the rest of Latin America. But the levels of instability and inflation of the past are nowhere to be found today, and what developed is a burgeoning middle class with tens of millions of young, educated workers moving up the economic food chain. In addition to the high-income Brazilian customers that always have existed

for multinational companies, there now are millions of up-and-coming consumers. For companies that are agile and adaptable, this is a huge opportunity to create new market share, as well as to protect the market share they already have.

“The instability and inflation issues we had have been gone now for 12 to 15 years,” explained Neves. “We have built very strong markets from both the perspective of production and consump-tion. That’s one reason Brazil has been able to ride out the financial crisis and recession and not be as affected by it.”

In Turkey, the events of the Arab Spring introduced a potentially new story line for consumer companies. While Turkey

The amount of global commerce among emerging markets20%

has long been a regional manufacturing powerhouse—it makes more televisions and buses than any other country in Europe and is the fourth-largest manufacturer of automobiles—the potential liberalization of the Middle East could position Turkey as the ideal launching pad for export to these countries. “Turkey as a base for production and exporting to the Middle East, as well as the Balkans, makes a lot of sense,” said Akan. “We have connections with all of these regions and a strong manufacturing and logistics capability.” Akan also pointed out that Turkish entertainment program-ming is very popular with certain Middle East countries, so companies that target Turkey as a market essentially hit all of the Middle East with their product advertising at no extra cost.

attribute three: Commit for the long haul

Colgate has been active in emerging markets for decades and maintained its commitment while managing political, operational, and cultural risk. But numer-ous other companies haven’t met with that success and have retreated. So for the retailer or consumer products company looking to make a long-term play in emerg-ing markets today, what are some of the most critical issues that need to be man-aged? (For Broadman’s personal point of view, see “Navigating the risks and oppor-tunities in emerging markets,” on page 44.)

First, the good news: Our panel agreed that the demographics in virtually all emerging markets work in any company’s favor. Take Africa, Turkey, and Brazil. Africa contains more than one billion people and some of the fastest-growing countries in the world in terms of GDP, including Ghana, which grew the fastest in 2010 (China was the fourth fastest growing). It is estimated that in 30 years’ time, one in every five children will live in Africa, and the continent will have the largest working-age population. Foreign direct investment overall still is quite low, accounting for less than five

percent into emerging markets, so there still are plenty of opportunities. “Africa strikes me as a perfect case of first-mover advantage,” posited Broadman.

Turkey boasts a growing and youthful popu-lation. While it has few natural resources to speak of, its manufacturing acumen and geographic position at the crossroads of Asia and Europe make it an ideal platform for production. Its growing Internet usage and relative lack of a modern retail industry make it a ripe growth area for global online retailers. And Brazil? It might have the best demographic profile of any emerging mar-ket: a large, young, educated population; abundant natural resources; a multicultural society; and a high percentage of Internet penetration. But challenges remain.

InfrastructureOver the past two decades, China has shown how advancing a country’s infrastructure can help spur economic growth. In the case of Brazil, the country completed many in-frastructure projects due to its hosting of the soccer World Cup in 2014 and the Summer Olympic Games in 2016 in Rio de Janeiro.


But as Neves pointed out, strong Internet access can go a long way toward hiding weak spots in infrastructure: “In Brazil, the way that companies are looking to use social media to test products and introduce new products into the marketplace has really overcome part of the infrastructure need.” In fact, any company looking at Brazil as a long-term investment needs to under-stand this equation: The combination of a youthful, educated populace; an Internet penetration rate of more than 50 percent and growing; and a burgeoning middle class equals a huge potential for online retail-ing. “We have a very young population and high level of Internet usage—and not just homes with high speed Internet,” Neves said. “Hundreds of thousands of shops offer access where anyone can go in. And they are buying things online as well.”

Infrastructure needs in Turkey and Africa, apart from South Africa, are more daunting. Akan recounted how Turkey still predomi-nantly uses railways built before World War I. Wilkinson pointed out that companies opening multiple factories in Africa often don’t realize the continent’s enormous size—the land masses of China, the US, and

India all would fit within Africa’s borders—and distance between the major cities. And the continent’s ports, like Turkey’s railroads, are from another era. Despite the prob-lems these infrastructure gaps present for companies doing business, one silver lining, according to Wilkinson, is that many compa-nies that work on infrastructure projects no doubt will prosper in the coming years.

CorruptionEach member of the panel addressed cor-ruption and graft—issues likely to come up in any discussion of emerging markets. Interestingly, each saw the problem in terms of the larger questions of advancing an open political system and maintaining the rapid clip of economic growth. The belief is that corruption is less when there is a robust economy and the political system is open. “We are very proud of our democracy in Brazil and the liberty of the press,” Neves said. “The reality is that consumer products companies will face the issue, especially those that sometimes sell through direct channels to government agencies or to some of the local municipalities. But with our democracy, and as we keep improving eco-nomically, we will continue to clean that up.”

In Turkey, Akan pointed out that the country has bettered its position on various indices that track corruption. He believes that “things have improved a lot in the last 10 years, and it is mainly attributable to the improvement in economic growth.” Wilkinson noted that companies that don’t stick to strict rules and impeccable business ethics end up regretting it. “Some compa-nies investing in South Africa and the rest of Africa have bent a little to the left or right, and they end up getting burned,” he said. “So they’ve learned their lessons.”

Seizing opportunitiesIt was fitting that an executive as well-traveled and experienced as Tangney offered the final perspective on the cyclical nature of world business and the need to spot opportunities where they exist: “I can remember when Latin America was weak and dangerous,” he said. “They spoke of the debt crisis. Now it’s the Europeans who have the debt crisis. Today, in our world, Africa has the high potential to do very well. Companies have to act according to their beliefs about what the future holds.”

1:5It is estimated that in 30 years’ time, one in every five children will live in Africa, and the continent will have the largest working-age population. Foreign direct investment overall still is quite low, accounting for less than five percent into emerging markets, so there still are plenty of opportunities.


One question increasingly on the mind of a lot of corporate senior executives today is: What are the risk/opportunity tradeoffs of investing in emerging markets? Of course, emerging markets—a term that typically refers to all developing countries—are not a monolith. They are a very heterogeneous group. But the fact is that, as a whole, the rate of growth in emerging markets for the past decade and a half has been twice that of advanced countries, and this trend is unlikely to abate anytime soon. This is why there is increasing interest in emerging markets by companies in advanced economies, where growth has been much slower. Importantly, these growth differentials reflect a secular transformation in the structure of the global economy, not a cyclical phenomenon occa-sioned by the current economic/financial crisis. This is a critical distinction that too few corporate executives appreciate.

understanding the challenges and rewardsThere are, however, significant mispercep-tions about the challenges and rewards of doing business in emerging markets. In many cases, the risks are either highly understated or grossly overstated. The same is true with opportunities. Take China, for example. Many executives of large com-panies believe they should—and can—do business there.1 From my experience hav-ing worked for two decades in China, the investment environment there is far more nuanced and complex than most investors appreciate. In my view, it’s a classic case of

a place where the on-the-ground invest-ment risks generally are understated. At the other extreme, consider Africa. Most corporate managers whom I talk to in developed countries lack accurate informa-tion about market conditions on the African continent. They don’t know that about one-half of the population in sub-Saharan Africa lives in countries where GDP growth, adjusted for inflation, has averaged more than 5 percent per year over the last two decades, or they don’t know that there is a burgeoning African middle class (and I’m not referring to South Africa alone, by any means). Indeed, a large number believe there simply aren’t any realistic investment opportunities in Africa. At the same time, people see African markets as fraught with excessive risk. There are, of course, appreciable risks of investing in Africa—just as there are substantial risks of investing in Latin America, Asia, the Middle East, the former Soviet Union, and so on. But the perceived risks in Africa are grossly overstated. In fact, according to recent data from the United Nations Conference on Trade and Development, Africa offers the highest risk-adjusted returns on foreign investment among all emerging economies.

It’s not just advanced country CEOs who are pondering investment in emerging markets. Powerhouse multinationals out of Brazil, China, India, and South Africa—among oth-ers—are themselves competing across their own geographies. At the same time, such firms are becoming bona fide contenders for market share in developed markets (North). Indeed, not only are the traditional trade

and investment flows continuing between developed and developing economies, but there is tremendous growth in commerce among emerging markets (South-South). South-South trade now accounts for a sizable 20 percent of all global trade, and one-third of foreign direct investment outward flows originating from the South go to the South.

Implications for strategy and operationsWhat does this transformation mean for business strategy and operations of advanced country multinationals? They’re confronting a host of new risks and oppor-tunities as they aim to compete not only with their longtime rivals from developed countries but also with world-class emerging market firms. Consider the athletic footwear industry. Most of the major athletic foot-wear firms are headquartered in the North but produce a majority of their output in the South, especially in China. And, as it happens, a sizable portion of Chinese pro-duction in this sector is exported to Brazil. The result is that Brazilian athletic footwear manufacturers feel they cannot effectively compete against the Chinese—so much so that Brazil believes these products are being dumped at an artificially low cost into the Brazilian market. Consequently, Brazil’s government placed a duty on imported Chinese athletic footwear. This ensuing trade war among the governments of two large emerging markets has sideswiped the world’s major branded athletic footwear companies, cutting their sales revenues and leaving these companies with little recourse for remedies in the short run.

In light of all this, how do Northern multi-nationals move forward to exploit the new opportunities arising in the fast-growing emerging markets while mitigating the risks? The first critical step is to ensure you know your customers, your partners, the particular government with which you’re dealing, and other stakeholders. The best way to do this is to carry out tailored due diligence, employing different types of lenses and techniques and especially by using independent, verifiable sources.

Navigating the risks and opportunities in emerging markets

By Harry Broadman

Harry Broadman is Chief Economist and Leader of PwC’s Emerging Markets practice.

1 For a recent discussion on China, see “Pearls, pitfalls, and possibilities,” Marketmap, Issue 1, 2011.


To be sure, carrying out world-class due diligence can be more difficult in emerging markets since, by definition, their institu-tions are nascent and their information frameworks less developed. I frequently see companies rely on self-proclaimed experts in the local economies, only to discover that these people themselves are not the best people to have relied upon. The ability to perform world-class due diligence comes from having done it repeatedly throughout challenging parts of the world so there is the capacity to recognize similar problems when they crop up, and the information is collected and interpreted by parties who are independent to the transaction and are mutually trusted by all sides.

Such due diligence can be applied in a number of ways by foreign investors to effectively mitigate risks and maximize opportunities. One approach is to establish business-to-business (B2B) alliances. For example, a multinational electric power company might establish a B2B agreement

with an oil company in Vietnam because that’s a high-risk, high-return market. If the B2B performs well, the two companies could replicate the relationship elsewhere in Southeast Asia or in another region.

Business-to-government agreements or public-private partnerships are another avenue. A multinational engineering and construction company recently signed a 15-year master service agreement with the government of Gabon to become an anchor investor and provide management and technical support to the government as it develops a national infrastructure master plan. Similarly, a major beverage multina-tional has formed a partnership with a large private foundation, three African govern-ments, and a project management entity that provides for local fruit farmers to sell juice to the beverage’s supply chain, substi-tuting for juice imports. Win-win solutions like these expand the bottom line and also fulfill legitimate objectives on the part of a government to spur growth and create jobs.

For more ways corporations can manage risk while exploiting opportunities, see the graphic below.

This list, of course, is not exhaustive. But it illustrates the type of tactics that, if adopted, can significantly reduce a firm’s exposure to risks.

adapting to changeThe industrial landscape of the world market has changed unalterably. But this is just the beginning. There will be multiple growth nodes from here on out and not just between the advanced countries and the emerging markets—but within emerging markets. The effect on companies from the developed world will continue to be profound. Adopting an investment strat-egy informed by accurate information and trusted partners with deep local insights and experience is the best way to navigate the risk-opportunity tightrope. But the big-gest risk in emerging markets could be just ignoring them.

Five more ways corporations can manage risk while exploiting opportunities

Prevent, control, and contain losses related to corruption.

Know the local and regional jurisdictional nuances.

Watch operating model efficiency amid pressure to sustain profits.

Bring local talent into the business and take leadership to the streets.

Be a model of absolute business ethics.

1 2 3 4 5


Sharing in Asia’s growthP&G’s Asia Group President Deb Henretta provides unique perspectives on the region—its culture, diversity, and potential

Interview


When it comes to the global economy, all bets based on old assumptions are off. “Of the few bright spots in the global economy, none is proving more influential on business strategies globally than the transformations underway in Asia Pacific.”1 In this interview, Ms. Henretta looks at the challenges and opportunities of doing business in the region. She also offers advice on how Western businesses can tap into Asia’s explosive growth.

Interview by Tom Craren and Gene Zasadinski

Tom Craren is PwC’s partner-in-charge of Thought Leadership. Gene Zasadinski is managing editor of View magazine.

pwC: You are currently based in Singapore and have been for more than six years. What attracted you to the Asia-Pacific region, and what continues to hold your interest?dh: I love being in a region where the growth is so dynamic. This is where business is happening right now. Asia is leading the globe out of the macroeconom-ic crisis. Growth trends have rebounded, and there’s so much upside potential with the consumers here. It is a lot of fun to do business in a place that’s growing, that’s dynamic, that’s vibrant, versus some other

Deb Henretta is Group President—Asia and Global Specialty Channel for Procter & Gamble. Currently based in Singapore, Ms. Henretta is the first female chair of the APEC Business Advisory Council (ABAC). For two consecutive years (2007-2008) she was listed as one of The World’s 50 Most Powerful Women (Fortune magazine) and, in 2006, was named to The Wall Street Journal’s Top 50 Women to Watch. She is and has been active in a number of philanthropic organizations, including Caring for Cambodia and the YMCA Prevention of Family Violence Coalition. Ms. Henretta also leads Procter & Gamble’s Advancement of Women, which has won the prestigious Catalyst Award.

parts of the world where things are a little bit more stagnant.

pwC: Are business and government leaders paying enough attention to the Asia-Pacific region?dh: If you’re going to be playing on the international scene in business or in government, you have to look at the whole globe, and if you’re doing that right now you are seeing a contrast between the problems in the developed world and the incredible upside opportunity in the developing world.

1 Executive summary, PwC’s 2011 APEC CEO Survey—The future redefined: Asia Pacific at an inflection point.

pwC: Are the developed economies not taking this broad view?dh: Sometimes I think the developed world tends to be too insular, and this is a mistake. The crisis of 2008 caused every-body to become more myopic, to focus on fixing their own issues. That’s understand-able, but it’s also shortsighted. The US, for example, can’t fix its economy by being insular because, relative to the rest of the world, we don’t have enough people to be self-sustaining anymore, and the world is too interconnected. And so what the US government and business leaders need to be doing is thinking about how they can participate in Asia’s growth.

pwC: How can they do that?dh: Some businesses will be more nationalized and have a little bit more of a regional focus, and that’s great. But the bulk of businesses are either going to have to think about being global or about supporting global companies in their inter-national expansion. In that way they can tap into the economic growth in Asia.

pwC: Is business ahead of government in this regard?dh: Yes, but organizations like the Asia-Pacific Economic Cooperation (APEC)2 are changing that by getting governments to refocus on opportunities in the Asia-Pacific region.

pwC: What would a business model look like for a company attempting to succeed in the Asia-Pacific region?dh: Well, at Procter & Gamble, we’re looking to capitalize on the cultural and consumer diversity that’s present in Asia. From a consumer perspective, as a large multinational company, we strive to pro-vide propositions for all the segments in Asia, from the wealthiest billionaires to the people making less than a dollar a day. De-veloping a product portfolio that can meet the needs of these extremes represents a huge business opportunity. From a cultural perspective, it’s important to find your way through a complexity of nationalities,

2 According to its mission statement, “APEC is the premier Asia-Pacific economic forum. Our primary goal is to support sustainable economic growth and prosperity in the Asia-Pacific region.” The full statement is available at http://www.apec.org. Ms. Henretta is the first female chairperson of the APEC Business Advisory Council (ABAC).


tastes, and religions to find your way to simple, scalable solutions that enable and generate profitable growth. So, in the end, it’s successfully managing a dichotomy be-tween serving the region as a whole while still connecting with local consumers.

pwC: Is talent a critical aspect of enabling that business model to succeed?dh: Yes. One of the most challenging aspects of doing business in Asia is the notion of recruiting and retaining the best employees. At P&G we believe people are our greatest asset. We have to, because we are a build-from-within company.

pwC: So attracting, developing, and re-taining the best talent is a top priority?dh: It is. The people we hire today are the people who are going to be the future leaders of the company. This puts a high premium on us finding and then hiring the best and the brightest. In Asia, we’re making really good progress on this front.

I think we’ve got strong, healthy relation-ships with some of the top universities here, which is a great conduit to the best talent in the region. We’ve also developed what we call the employee value proposi-tion—EVP for short.

pwC: Can you elaborate?dh: This program integrates all that the company has to offer to develop our employees into future leaders in a way that meets the needs of our Asian employees as reflected in the outcome of our annual employee surveys. We take as much care and pay as much attention to building our employee value proposition as we do to building a brand for our consumers.

pwC: Has this program been successful?dh: It has. In fact, in 2010, P&G Asia was among those that received the Asian Human Capital Award for our EVP program, which was cited as a breakthrough in people inno-vation. So that’s some of what we’re doing to make sure that we attract more than our fair share of the best and brightest in Asia.

pwC: Are there advantages unique to training talent in Asia?dh: I think so. We really try very hard to work on the multicultural aspects of leadership, and there’s no better place to develop those skills than in Asia because there is such diversity—so many different cultures. Asia is like a microcosm of the world, with every culture, religion, and nationality represented. Asia also has both highly developed markets as well as emerg-ing markets operating next to each other. So there is no better place to stretch people and to develop different leadership skills.

pwC: Do you see a relationship between diversity and competitive advantage?dh: I see a direct relationship. First, diversi-ty can be a great source of innovation. If you have a group of “like thinkers” in a room, you’re probably going to get one answer to a business problem. If you have a group of “diverse thinkers” with diverse ideas, you’re going to get many possibilities for solving business problems. You can take those and build on them to get an even better solution.

Sometimes I think the developed world tends to be too insular, and this is a mistake. The crisis of 2008 caused everybody to become more myopic, to focus on fixing their own issues. That’s understandable, but it’s also shortsighted.

pwC: And the second reason?dh: I think dealing with diversity forces you not only to figure out how to solve problems, but also to do so in a simplified way.

pwC: Can you explain what you mean by “a simplified way”?dh: Asia is incredibly diverse. If you were to try to develop the perfect business solu-tion for every nationality and every culture in Asia, you would drown in complexity. So in Asia, diversity is not only a source of ideas and the means to continually improve those ideas, but also a driver of simplified solutions, that is, leveraging the similari-ties to the greatest degree possible. That’s where you’re going to get scale, lower costs, and, ultimately, profitable business growth.

pwC: You mentioned innovation. Is there an Asian flavor to innovation as there is to talent?dh: Absolutely. The global innovation mod-el for most big MNCs has largely involved innovating in the West and taking your ideas to the East. I don’t think that model works anymore. There will be some times when innovation will work that way, but there’s go-ing to be an equal number—if not a greater number—of times when innovation is going to start in Asia and go back to the West.

pwC: How important is innovation to the region?dh: Innovation is absolutely fundamen-tal to business success in Asia. And there are three reasons why I feel that way.

First, innovation is going to be key to improving the quality of life for people. There are incredible challenges in Asia—environmental, social, and political challenges—and most of these are going to have to be solved with innovation—be it product innovation, process innovation, or policy innovation. Second, innovation has always been a key driver of our success and growth at P&G. Third, innovation has the potential to lift people out of poverty. I think companies that are able to help pull people out of poverty, are able to help fuel growth for an economy, and improve the quality of life by dealing with some of the challenges that the planet faces, are the companies that are going to emerge as leaders of the future.

pwC: We’ve touched on a number of ways in which business can positively affect people’s lives. Does that, in a sense, define your company’s vision?dh: Absolutely. Our company’s vision is really simple. Our vision is to improve the lives of more consumers in more parts of the world more completely. Everything we do, whether it’s designing a product, coming up with a go-to-market program, or developing and implementing our social responsibility and sustainability initiatives, it is all geared toward a single question: Are we improving the lives of consumers? If the answer to that is yes, then it’s within our company’s purpose. If the answer to that is no, we don’t do it.

Asia is incredibly diverse. If you were to try to develop the perfect business solution for every nationality and every culture in Asia, you would drown in complexity. So in Asia, diversity is not only a source of ideas and the means to continually improve those ideas, but also a driver of simplified solutions, that is, leveraging the similarities to the greatest degree possible.


the association of Southeast asian nations (aSean)3

The ASEAN governments are going to have to come together almost as a single market and production base so that they can bet-ter compete with some of the larger and faster-growing Asian economies. And while they’ve made pretty good progress in a number of areas, there is still more that can be done. One good example is the ASEAN Cosmetic Directive, which really helped standardize the regulatory requirements for cosmetics across the region. This is the kind of small but critically important step that is going to make it significantly easier for companies to do business in the region.

The Trans-Pacific Partnership (TPP)4

This initiative addressed by President Obama at the recent APEC summit is an incredibly strong trade initiative that will attempt to deal with emerging trade issues in areas like services and digital commerce. US participation in TPP is very welcome by business. American companies stand to benefit from the ambitious standards that TPP negotiators are aiming to achieve, especially in areas like speed to market, regulatory coherence, improved consumer value, and green growth solutions. By removing trade barriers, TPP will greatly simplify the way business gets done within Asia-Pacific and will help companies lower costs and grow their businesses.

Deb Henretta on . . .

perSpeCtIveS

Being the first female chairperson of the apeC Business advisory Council (aBaC)5

It was an incredible honor and challenge to step into that role. And while most of my work for ABAC is gender-neutral, my role does occasionally enable me to bring a woman’s perspective to an important issue facing the Business Council. For example, one of our objectives this year was to focus on the barriers to success being encountered by small business enterprises (SMEs6). As part of that effort, we put a focus on women because many SMEs are run by women entrepreneurs. So I and the other eight female members of the Business Council formed the ABAC Women’s Forum, which provided outreach efforts to connect with female entrepreneurs, business leaders, and business students. We then created a Web-based application that’s going to attempt to create a more regular conversation and dialogue among women in business.

giving backGiving back to a region that offers so much in the way of business opportunity is the right thing to do. So, for example, we have a program at P&G we call Live, Learn, and Thrive, which is our corporate social responsibility program, and through that we offer many programs that are geared toward the health and education of children. They include our Hope Schools in China—we just

built our 200th school. And because clean water is so important, we distribute water purification packets as a part of our disaster relief efforts in Asia. This water purifica-tion product is a P&G innovation which we created using our in-house technology to address one of the world’s biggest health problems: access to clean drinking water. The product not only eliminates all of the material residue that might be in the water, but also removes bacteria, viruses, and even low levels of arsenic. These are just a few of the ways we are helping to reduce poverty and to improve the lives of people in Asia.

lessons learned from being a momBeing a mom comes in really handy in run-ning a business. I always tell my children you’ve got to look at your glass as half full, not half empty. So, I remind them, when disappointments happen, look at your glass as half full. I ask them what other things are going right in their lives, and then maybe the obstacles or the disap-pointments are a little bit easier to take. And I think this applies to global business. If you are focusing on all the problems that need attention in the developed part of the world, you are looking at your glass as half empty. But we’ve also got to keep encourag-ing people to look at the glass as half full. And the glass that’s half full is the upside potential and opportunity that there is in Asia and the Asia-Pacific region.

3 Consisting of 10 member states, the aims and purposes of ASEAN are available on its website at http://www.aseansec.org.

4 The “broad outlines” of this agreement among the leaders of the nine Trans-Pacific Partnership countries can be found at http://www.ustr.gov/tpp.

5 Information about ABAC can be found at https://www.abaconline.org/v4/index.php.

6 Small and medium enterprises.


editorial

Editorial Director Tom Craren

Managing Editor Gene Zasadinski

Assistant Managing EditorChristine Wendin

View points Editor Angela Pham

Contributing EditorsMike Brewster Emily Church Cecily Dixon Susan Eggleton Benjamin Isgur Sandy Lutz Susan Poole Anand Rao Bill Sand Jamie Yoder

online

Jeffrey Dreiblatt Adiba Khan Scott Schmidt Jack Teuber

design

Odgis + Company

Creative Director Janet Odgis

Senior DesignerBanu Berker

DesignersRhian Swierat T. Chloé Bartholomew

Contributors

We thank the following individuals for their contributions to this issue of View:

Caroline Calkins-Heine Steve Lechner Alfred Peguero Daryl Walcroft

photography

AP Images

Brian Bielmann

Corbis Images

Bill Gallery

Getty Images

Andreas Herzau/Laif/Redux

iStockphoto

Vincent Lafloret

Chen Ming/Xinhua/Eyevine/Redux

Tommaso Rada/4See/Redux

Reuters Pictures

Brian Smale

Stephen Wilkes

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