The world is bumpy - globalization and new strategies for growth

The world is bumpy

Globalization and new strategies for growth

March 2012

Introduction

The world is bumpy Page 3

About this report

The world is bumpy: globalization and new strategies for growth is the

third annual report from Ernst & Young exploring trends in globalization

and their impact on multinational companies. The report is based on the

following original research:

► A globalization index, that measures and tracks the performance of

the world’s 60 largest economies across five dimensions:

► Openness to trade

► Capital movements

► Exchange of technology and ideas

► Labor movements

► Cultural integration

► A survey of 1,000 senior executives from around the world

► A series of interviews with CEOs, leading academics and other

globalization experts


Globalization continues to deepen

► After a brief pause in 2009, the overall average globalization score for the world’s

largest economies is estimated to have increased in 2011 and is expected to continue

increasing through 2015.

4

4.05

4.1

4.15

4.2

4.25

4.3

4.35

2008 2009 2010 2011 2012 2013 2014 2015

Predicted scores

Actual scores

Average globalization score

Source: EY Globalization Index 2011

Glo

baliz

ation in

dic

ato

r score


The Globalization Index

► The Globalization Index was created to measure the extent to which the 60 largest

countries (by GDP) are connecting to the rest of the world.

► This table provides a breakdown by country (or, where applicable, territory) for each of

the five key categories most relevant to business for the top 10 countries in the index.

Rank Country 2011 Score

Change in

score

since 2010

Change in

score

since 1995

Trade Capital Labor Technology Culture

1 Hong Kong 7.42 -0.24 -1.91 9.8 7.4 4.6 6.0 9.3

2 Ireland 7.24 0.13 -2.50 6.7 7.8 6.0 9.5 5.8

3 Singapore 6.88 -0.14 -1.13 10.0 6.2 4.4 6.5 6.9

4 Belgium 5.81 -0.07 -1.40 6.4 6.8 5.2 6.1 4.0

5 Sweden 5.72 -0.11 -1.83 5.4 6.0 4.4 8.4 4.0

6 Denmark 5.70 0.21 -1.64 5.3 6.2 4.4 8.3 4.0

7 Netherlands 5.58 0.09 -1.15 6.3 5.8 4.9 6.5 4.0

8 Switzerland 5.46 -0.19 -1.70 4.9 5.4 6.3 5.9 4.8

9 Finland 5.39 -0.09 -1.72 5.0 5.6 4.0 8.1 3.8

10 Hungary 5.19 0.06 -1.07 6.4 5.1 4.5 5.7 3.8


The focus of this program

Companies face a challenging and uncertain economic environment and

a highly competitive global marketplace, in which:

► Mature markets face sluggish growth prospects and high levels of

indebtedness.

► Rapid-growth markets, although expanding more quickly than

developed markets, are slowing.

► Competition is increasing as companies chase more elusive growth

prospects and as rapid-growth market companies grow

in sophistication.

► Policy is becoming more complex and uncertain.

► Operations are increasing in complexity and risk.

► Talent is becoming more scarce everywhere.

Key findings


Companies face four key challenges

1. Succeeding in rapid-growth markets is harder than it used to be. Costs are

rising, competition is becoming more intense and growth, while still rapid, is slowing.

Betting the future on rapid-growth markets just because they have the right

economic and demographic conditions is not enough.

2. One size does not fit all markets. As companies diversify into new markets, they

face increasing operational complexity. These include additional risks, such as

supply chain disruption, poor visibility into performance and lack of flexibility.

3. Policy has become more important and less predictable. An uncertain and

dynamic policy environment — especially rising protectionism — is causing concern.

Business leaders are also worried about rising in tax risk.

4. Good people are hard to find. Companies find it increasingly difficult to match

suitable candidates with available positions. Senior managers with local knowledge

are particularly scarce. In rapid-growth markets, increased competition for talent

from local players compounds the problem.

1. Succeeding in rapid-growth markets is harder than it used to be


The challenge

► Companies are increasingly looking to rapid-growth markets as their

best opportunity for growth. Almost three-quarters say that these

markets will make a significant difference to their revenue growth.

Role of rapid growth markets in revenue growth

What role do you expect rapid-growth markets to play in the following aspects of your business over the next three years?

10

14

15

23

31

30

38

72

62

54

51

39

35

29

Overall contribution to boosting revenue growth

International expansion plans

Contribution to boosting market share

Cost effectiveness (e.g., through outsourcing or access to low cost skills)

Source of new innovations

Source of high-quality operational talent

Source of high-quality managerial talent

Not a significant role Significant role

Source: Globalization Survey 2011.

Please rate 1 to 5 where 1 is very significant and 5 is not at all significant. Shown: Percentage 4 or 5 vs. percentage 1 or 2 score. Base: Total (994).


The challenge

► More than half of respondents think that these markets require longer

time horizons, and almost half believe that the cost of entering is

greater than expected.

► Companies face a squeeze on growth prospects in rapid-growth

markets:

► Increased competition from other multinationals and

increasingly sophisticated local players

► Slowing growth – respondents see asset price bubble as the

most likely risk to derail growth

► Potential bubbles


Response: think like a start-up

Shed organizational baggage.

► Developed world multinationals have spent years refining their

business processes, but this can be a burden.

► Processes may be too rigid, business models tired and the

organization may lack flexibility.

► In order to succeed, they must:

► Shed their legacy processes and capabilities

► Rethink their approach from the ground up, and behave more like

a start-up

► Reinvent their business model to suit the local market

This will give them greater flexibility and capacity to respond quickly to

emerging opportunities and risks.



Devise innovative strategies that will secure a quick pay-off.

► In the past, companies recognized that investments in rapid-growth

markets were long term.

► This worked as long as they could fund the new investments using

profits from their core markets.

► But with developed markets slowing, recycling this capital is no longer

an option.

► Instead, companies must:

► Develop innovative business models and solutions that will enable

them to earn a much quicker return

► Ensure that growth can be achieved in rapid-growth markets via

self-sustaining models, rather than though investment from profits

from developed markets



Take a broader stakeholder view toward the investment.

► The financial crisis has reawakened the debate about the role of

business in society.

► Pure shareholder value creation is falling out of favor.

► Instead, companies need to take into account the needs of a broader

range of stakeholders, especially in rapid-growth markets.

► To succeed, companies must:

► Work closely with a wide range of stakeholders, including

government, local communities and their partners

► Understand the role of government in the private sector and where

the boundaries lie

► Become involved in the development of the country itself rather

than solely the investment, for example, through infrastructure

► Have a higher purpose that goes beyond pure economic logic to

think more holistically

2. One size does not fit all markets


The challenge

► As companies adopt a more global approach, they inevitably

encounter greater complexity.

► Two-thirds say that they will increase the number of their external

partners over the next three years, and more than half say that their

supply chain will become more complex.

65

54

49

45

62

54

49

42

69

54

49

51

Number of external partners with whom your company works

Complexity of the supply chain

Exposure of the supply chain to risk of disruption

Proportion of operational functions that you outsource to external providers

Total

Developed markets

Emerging markets

Q: Over the next three years, what change do you expect to see to the following aspects of your company’s operations? Please select increase, no change or decrease

for each item. Shown: Percentage increase. Base of companies with international supply chains: Total (551), developed markets (359), emerging markets (192).


Response: adapt your approach to new operational complexities

Integrate networks according to logically grouped markets.

► The need to strike a balance between global and local is a major

challenge for companies seeking to be relevant to local customers

while still deriving benefit from economies of scale.

► To address this challenge, companies must:

► Strike a careful balance between standardization and the need to

remain relevant and close to end-customers

► Develop hubs that can provide shared services or resources at a

regional level, yet still be close enough to the end-customers to

understand their specific needs and challenges

► Consider how groupings of adjoining markets can be created to

follow patterns of trade, which still take place largely within

geographic regions, as well as regional trade agreements



Rethink approaches to outsourcing.

► A changing, uncertain world requires companies to be adaptable and

able to respond quickly to new opportunities and risks.

► Resources are fixed and tough to move, so will cause problems for

companies in need of flexibility.

► Instead, companies must:

► Shift their cost structure to one that is variable rather than fixed

► Use outsourcing to increase organizational flexibility and help

companies deal with a high degree of complexity

► Learn from the experiences of some rapid-growth market firms that

have adopted a simplified operating model from the outset

► But ensure that outsourcing does not lead to a loss of control



Investigate the benefits of near-sourcing.

► In the past few decades, it has become accepted wisdom that

companies should offshore non-core functions, such as manufacturing,

to low-cost destinations such as China.

► But rising labor costs in these markets and volatile commodity markets

are causing some companies to question this.

► Instead they are:

► Assessing the fragility of their supply chains and determining

whether a new approach is appropriate

► Considering shifting their supply chain from a sea-based one to a

land-based one

► In some cases, bringing manufacturing back to developed markets,

like the US, to ensure security of supply and take advantage of high

labor capacity and lower prices for manufacturing assets

3. Policy has become more important and unpredictable


The challenge

► More than half of our survey respondents say that an increase in

protectionism in the markets in which they operate could have a

negative impact on their growth prospects.

51

36

34

33

32

17

16

52

37

35

32

29

16

15

49

34

33

35

36

19

16

Overall growth prospects

Willingness to invest internationally

Plans for international expansion

International competitiveness

Supply chain and procurement costs

Time to market

Ability to access appropriate skills and talent Total Developed markets Emerging markets

Q: Should there be a rise in protectionism in the overseas markets in which you operate, which of the following areas of your business would be

negatively affected? Base: Total (994), Developed markets (635), Emerging markets (359).


The challenge

► There are concerns that governments could resort to protectionism to

bolster flagging economies. More than half of respondents think that a

deteriorating economic environment will cause a dramatic increase in

tit-for-tat protectionism.

62

58

58

55

53

49

36

62

57

59

52

55

47

35

61

59

57

60

49

51

37

New global financial crisis triggered by European sovereign debt defaults

A deteriorating economic environment causes a dramatic increase in tit-for-tat protectionism

Further round of quantitative easing in the US

Further capital controls in emerging markets to prevent speculative flows of capital

Global economy falls into recession

An intensification of competitive currency devaluations by policy-makers

Significant upward revaluation of the Chinese currency Total Developed markets Emerging markets

Q: How likely do you think it is that the following scenarios will occur in the next 12 months? Please rate 1 to 5 where 1 is very likely and 5 is

not at all likely. Shown: Percentage of 1 or 2 scores. Base: Total (994), developed markets (635), emerging markets (359).


Response: build a strategy for connecting with governments

Engage with policy-makers to make the right decisions.

► Faced with a potential uptick in protectionism, many business leaders

may conclude that the issue is out of their hands.

► Only 15% of companies say they are fully prepared for an increase in

protectionism and have factored it into their strategic plans.

► But companies can take concrete steps:

► Engage with governments and trade departments to prevent

counterproductive measures

► Ensure that governments understand the economic benefits of

increased trade

► Consider shifting their supply chain from sea-based to land-based

► Correct misinformation among consumers about the impact

of globalization



Combine local knowledge with global co-ordination.

► The global tax environment has never been so fast-moving or

dynamic.

► 78% of the world’s largest companies say they are already

experiencing greater risk or uncertainty around legislation.

► To deal with this, companies can:

► Put in place a mix of local, on-the-ground knowledge – often

gained through outsourcing arrangements – with the ability to

coordinate at a global level

► Ensure that decisions that involve tax are taken in the context of

the company’s broader context and strategic goals



Build stronger relationships with tax administrations.

► Companies are encountering a high degree of tax risk, particularly

with cross-border investments.

► To deal with this challenge, companies should:

► Build transparent relationships with authorities so that issues can

be addressed early rather than waiting for an audit or controversy

► Where possible, explore the potential of forming enhanced

relationships and alternative dispute resolution mechanisms with

tax administrations

► Ensure a robust approach to maintaining adequate, easily

accessible documentation that can be provided when challenged

4. Good people are hard to find


The challenge

► Although the economic prospects of developed and emerging markets

are diverging, there is a common thread running across all markets:

companies everywhere find it increasingly difficult to match skilled

professionals with available positions.

14

16

18

21

16

13

18

14

31

36

37

35

47

50

49

57

56

48

45

44

37

36

33

28

Recruiting senior managers with local knowledge and understanding

Retaining employees

Ensuring that salaries and benefit packages keep track with local competition

Recruiting employees with appropriate experience

Addressing weaknesses in current talent pool

Forecasting talent requirements

Succession planning for top management talent

Measuring performance of employees

Developed markets Equally challenging Fast-growth markets

Q: Compared to this time 12 months ago, in which markets are you currently experiencing most difficulty in the following dimensions of talent management? Base: Total (994).


Response: embrace bold approaches to talent management

Put the best talent in the most promising markets.

► Many companies have been slow to send their top talent to rapid-

growth markets, sending people who are ―good enough‖ rather than

those who are best in class.

► Instead, companies should:

► Send the best talent available on the basis that these markets are

changing rapidly and are highly competitive

► Future-proof their talent by putting in place managers who will

have the skills and authority to lead the larger markets of

tomorrow, not just the smaller markets of today



Promote managers in line with the pace of the market.

► In rapid-growth markets, where employee churn can be 20%, and

where salaries are rising at a similar rate, companies need to consider

what will make them stand out as an attractive employer.

► This means that companies should:

► Invest heavily in training to prepare managers for future challenges

► Promote internally to show employees that they have significant

opportunities if they stay with the company

► Promote people sooner than you would in a more mature market,

even if this means giving them a level of responsibility that is

greater than their experience



Revamp the expatriate model.

► Traditional approaches to expatriate managers are becoming tired

and are rarely successful.

► Just 29% of respondents say that their company is effective at

relocating employees with minimum disruption.

► Instead, companies should:

► Work hard to ensure that expatriate postings are not only attractive

but also benefit from access to top management

► Give managers from rapid-growth markets exposure to more

developed markets through a ―reverse expat‖ experience

Closing remarks


What’s next?

► Global businesses face an ever-tightening squeeze of slowing growth,

increasing competition and increased volatility.

► Globalization continues its inexorable march, but the challenges of becoming

truly global are harder and the responses less clear-cut.

► Managing across divergent economic environments demands new

management capabilities and the ability to lead diverse teams across multiple

time zones and geographies

► To succeed in this environment, companies may need to give more decision-

making weight to the markets with the best growth potential, relocate key

executives to fast-growth markets and shift their focus to a model that takes

into account a broader range of stakeholders.


Appendix: Measuring globalization

► The Globalization Index measures the performance of the world’s 60 largest economies

according to 20 separate indicators.

► The indicators fall into five broad categories: openness to trade, capital movements,

exchange of technology and ideas, labor movements, and cultural integration. These

factors have been weighted based on the significance placed upon each factor by 992

surveyed senior company executives doing international business. Subsidiary

indicators are also given sub-weightings within each category.

► The indicators chosen include both quantitative data and qualitative scores from a

range of trusted sources. The performance of countries is measured over time, so that

progress toward greater or lesser globalization since 1995 can be observed, with a

forecast of likely performance until 2015.

► Our Globalization Index measures ―relative‖ rather than ―absolute‖ globalization. This

means that an economy’s trade, investment, technology, labor and cultural integration

with other economies is measured relative to its GDP rather than by the absolute value

of these elements being exchanged. The Index, therefore, reflects the degree to which

the global integration of an economy is observable or experienced from within

that economy.


Appendix: Globalization Index indicators

► The Globalization Index was created by identifying the key indicators of globalization

most relevant to business. The table below shows, for each of the headline categories,

the individual indicators used and their source. The categories were then weighted

according to the views captured in a survey of 992 business leaders.

Category and indicators Source

Movement of goods and services

Total trade (exports + imports) as %GDP National accounts

Trade openness (5=very high) Scored on 1-5 scale by EIU analysts

Tariff and non-tariff barriers (5=very low) Scored on 1-5 scale by EIU analysts

Ease of trading (cross-border) (5=very easy) Scored on 1-5 scale by EIU analysts

Current-account restrictions (5=very low) Scored on 1-5 scale by EIU analysts

Movement of capital and finance

FDI flows (in and out, % of GDP) IMF International Financial Statistics

Portfolio capital flows (in and out, %GDP) Scored on 1-5 scale by EIU analysts

Government policy towards foreign investment (5=very encouraging) Scored on 1-5 scale by EIU analysts

Expropriation risk (5=non-existent) Scored on 1-5 scale by EIU analysts

Investment protection schemes (5=very good) Scored on 1-5 scale by EIU analysts

Domestic favouritism by government (5=No favouritism; level playing) Scored on 1-5 scale by EIU analysts

Movement of labour

Net migration rate (per 1,000 population) United Nations

Current transfers (in and out, as %GDP) IMF International Financial Statistics

Hiring of foreign nationals (5=very easy) Scored on 1-5 scale by EIU analysts

Exchange of technology and ideas

R&D trade (in and out, as %GDP ) IMF Balance of Payment Statistics; EIU estimates

Broadband penetration International Telecommunications Union

Internet users International Telecommunications Union

Cultural integration

Tourism (in and out, per 1000 population) World Tourism Organization

International outgoing fixed telephone traffic (minutes) per capita International Telecommunications Union

Openness of national culture to foreign influence (5=very open) Scored on 1-5 scale by EIU analysts

Thank you


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