Archive for the ‘International Business’ Category

Going global the smart way

Canadian companies need to look to global markets to drive growth, or even survive, in today’s economic climate.

The impetus for companies to go global is driven by a number of trends. The country’s market is relatively small, fragmented and grows slowly. Many firms face threats from emerging markets and rebounding American competitors, all spurred on by globalization and falling trade barriers and tariffs. At the same time, it’s never been a better time to export thanks to a weaker dollar, extensive ties between new Canadians and their home countries and the world-shrinking impact of technology.

How can companies prudently go global without incurring undue risk and blowing the budget? Consider this 5C strategy framework:

1. Country acumen

Companies need to deepen their analysis of target markets beyond counting the number of potential customers or identifying competitors. Businesses need a granular understanding of customer habits, distribution channels, pricing and regulations.
2. Competitiveness

Business will never take off if it’s not able to design and deliver a competitively priced product tailored to local needs. Expect to go through multiple executions to find the winning product and an approach to marketing it.

3. Connections

In many markets success hinges on finding and working with politically connected, reliable and experienced business partners. They’re vital to establishing initial credibility, overcoming hurdles and helping secure early customer acceptance.

4. Capital

Companies need not break the bank when exporting, especially when they’ve done their homework and have the right partners. However, managers shouldn’t be too frugal either. Business risks can increase when you under-spend in critical areas like customer care, logistics and local professional services.

5. Commitment

As with other major investments, having unrealistic short-term goals can lead to disappointment. Patience and fortitude are needed, particularly in the less developed markets where things that could go wrong often do.

Learn from others

Plenty of Canadian companies have successfully gone global and offer what they learned to those considering the exporting plunge. CSR Cosmetic Solutions, a medium-size firm based in Barrie, Ontario, is one such example.

CSR is a contract manufacturer competing in the global cosmetics and personal care product industry. It was established in 1943. Almost 80 per cent of the business is exported to Costa Rica, France, Germany and the U.S. among other countries. Here are a couple of top tips that helped them.

1. Raise your game

CSR believes companies have to be competitive on a global basis over the long term, regardless of fleeting advantages like favorable exchange rates. Businesses should also deliver superior products to compete against incumbents in their home markets.

CSR also raised its game by doing the right things, right. For example, they regularly aim to improve competitiveness by stripping out unnecessary costs, training employees and prudently leveraging new, productivity-enhancing technology and equipment.

2. Pick the spots that play to your strengths

CSR is very strategic in terms of which markets they target and how they penetrate them. They only choose markets where their corporate strengths – product innovation, organizational agility and delivering tailored solutions – can deliver a winning value proposition.

Furthermore, CSR minimizes risk by deeply understanding their target market including cultural norms, regulations and customer buying behavior. Finally, CSR strives to eliminate the client’s impression they are dealing with a foreign supplier. For example, in the U.S. the company uses American consultants for business development and account management. Marketing is tailored to reflect regional needs. And CSR’s logistics strategy is designed to virtually eliminate any border issues.

Steve Blanchet, CSR’s president and chief executive officer, says he tries to make its global trade seamless for the company and its customers.

“We continually review and understand the changing market conditions and regulations in our export markets,” Blanchet says.

There is no silver bullet strategy to winning in foreign markets. Instead, success is about keeping an eye on the fundamentals: being bold, doing your homework, demonstrating agility and focusing on continuous improvement from a cost and product perspective.

Mitchell Osak is the Managing Director, Strategic Advisory Services at Grant Thornton LLP, a leading Canadian advisory, tax and assurance firm. He can be reached at Mitchell.osak@ca.gt.com and on Twitter @MitchellOsak

The perils of offshoring

For North American companies looking to stay competitive, outsourcing some or all of their back-office business operations to India has achieved the status of dogma. However, in the past couple of years poor outcomes, changing cost dynamics and continued cultural challenges have swung the value and performance advantage back to North American providers in many cases.

The times they are a-changin’

Firms migrated operations to India to save money, focus on their core competencies, and move way from a fixed cost structure.  Today, faith in offshoring must be tempered by reason.  In the last few years, India’s significant advantages have yielded to some harsh economic realities.   New cost dynamics and the reality of doing business halfway around the world with a very different culture have reduced the attraction of offshoring many operations, particularly those in knowledge intensive industries.

India’s fading appeal

Four key developments, unlikely to dim in the medium term, are contributing to offshoring’s declining appeal:

Shrinking wage differentials

India’s primary advantage, low labour costs, has been steadily declining.  According to the U.S. Bureau of Labor Statistics, India’s average per-hour cost advantage in 2010 had shrunk to only 6-7 times U.S. rates versus 11 times the rate in 2001. This shrinking differential traces to a combination of Indian wage inflation and North American wage moderation.   If present trends continue, this gap could shrink to five times the U.S. rate by 2014.

Pervasive cultural challenges

India remains a culturally challenging place to do business; a situation unlikely to change in the medium term.  The differences–language, cultural mores, business practices–generate high indirect costs by introducing complexity, miscommunication and risk.  Furthermore, persistently high labour turnover in all Indian firms complicates attempts to close this ‘cultural gap’.

Higher than expected administrative costs

When they began outsourcing, firms understood there would be transaction costs — travel, communication, compliance and relationship management.  What virtually every company has experienced are administrative costs typically three times higher than their estimates and all tracing back to geographic and cultural challenges.  In some cases, these costs can make up close to 20% of the total project cost.

Increased business risk

Today, effective risk management (e.g., protecting intellectual property and sensitive data, business continuity) is a strategic prerequisite for many companies.  Lingering doubts remain that sensitive data and intellectual property sent over to India (or any other emerging economy) is as secure as it would be in North America.  Not surprisingly, some government regulations continue to prevent certain types of IP and sensitive data from leaving North America.  Furthermore, India remains in the center of one of the world’s most dangerous regions, with instability on all of her borders and inside to boot.

Case in point: IT services

IT services provide a good illustration of the challenges of offshoring. For the past 10 years, CIOs and professional services firms have enthusiastically offshored to India large swathes of their IT work in order to reap the advantages of lower wages and round-the-clock development.

In many cases, however, the promise has not kept up with reality.  India no longer possesses the same IT cost advantage versus innovative Canadian firms.  Alex Rodov, managing partner of North America’s largest dedicated software testing firm, QA Consultants, contends that “Canadian IT labour rates on average are no more than 20% higher than India’s.  After you factor in the high administrative costs, lack of visibility and hassle of doing business around the world, then our delivered costs are roughly equivalent.”  Secondly, India’s workers continue to suffer from poor productivity.  Despite working in modern facilities, most Indian IT workers (including recent grads) lack basic technical skills and rudimentary English language proficiency.  In fact, the Wall Street Journal has reported that 75% of India’s technical graduates are unemployable by their IT sector.

Finally, the integrated structure favoured by most Indian software enterprises — firms develop and test their own code — poses real quality and delivery risks. “This [model] often leads to poor outcomes.  Testing should never be done by the same firm and people writing the code,” says Rodov, “as they lack objectivity and independence.  Furthermore, when a project runs late or is over-budget, the same Indian firm will prioritize development, often cutting corners with vital testing operations.”

For many business operations the pendulum is beginning to swing back to North America. Many companies have done the math and now realize that some local providers can deliver better value and lower risk versus an offshore Indian solution. A forthcoming article looks will look at how innovative North American firms are beating the offshorers at their own game.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Reduce risk via operational hedging

Exchange rates play an important role in determining corporate profitability and competitiveness. The current strength of the Canadian dollar poses unique risks and opportunities for Canadian companies with global supply chains and those who sell in many geographic markets.

Specifically, firms must manage having their revenues denominated in Canadian dollars and their costs denominated in other currencies. Exchange rate fluctuations, specifically a steep fall in the loonie, will introduce significant variability in costs and revenues potentially wreaking havoc on profitability, competitiveness and shareholder value.

While there are solid benefits to a strong dollar (e.g. stronger purchasing power), there are also compelling financial and strategic risks around a rapid and sustained fall in the loonie. Managers would be wise to pursue a more holistic and longer-term approach to risk management, with particular attention paid to operational strategies.

The loonie is at a record high versus key foreign currencies. Canada’s dollar traded stronger than parity with its U.S counterpart on average this year for the first time in three decades. The currency averaged 98.92¢ per U.S. dollar in 2011 – the highest annual value since 1976 when it traded at US.63¢. The loonie’s relative value against the greenback is vital to almost every company as the U.S. is by far Canada’s largest trading partner.

Furthermore, the loonie is overvalued against other key currencies. For example, Canada’s dollar had its strongest annual close against the euro since the shared currency began trading in 1999. Is a strong loonie sustainable in the long term? Not likely. According to the IMF, the loonie is will be 20% overvalued versus the greenback on a purchasing power-parity basis. The larger the overvaluation and the longer it is sustained, the greater the business risk.

A rapidly falling loonie will have serious implications for Canadian firms with outsourced production including higher input (raw material, labour and transportation) costs, a potential loss of domestic market share versus domestic producers and eroding profit margins. There are many macro-economic and political reasons why the loonie could drop quickly and precipitously.

Ongoing uncertainty around the European debt crisis as well as a slowdown in Chinese growth may dampen the global economy and demand for the commodity-driven loonie.  Canadian fiscal performance may hit the skids plus there remains the potential for falling interest rate spreads versus the U.S. Finally, continued political instability in the Middle East and Asia threatens to create instability in the currency markets. Canada is a relatively small currency market and is not a safe haven for international investors in times of turmoil. When fear grips markets, flight-to-safety flows hurt the loonie.

The impact of a long-term fall in the dollar’s value and the associated exchange-rate risk is not only limited to short-term financial exposure. In an integrated global economy, companies face strong interdependencies across their risk categories – strategic risks, operational risks, financial risks and external risks – which can quickly degrade their competitive position, limit decision-making flexibility and shrink operating margins.

Traditional financial hedging tools, designed to smooth out short-term cash flows, are often insufficient or too expensive to address large and sustained exchange rate shifts. To effectively manage these longer-term risks, companies should employ “operational hedging.”

Operational hedging is a holistic risk-management approach that allows for greater flexibility in how supply chains, product distribution patterns and market-facing activities are designed and changed. Managers would use operational hedging strategies in conjunction with financial hedging to pre-empt or mitigate the effects of a large, exchange rate-triggered change in their cost structure, customer demand and competitiveness. Typical operational hedging strategies could involve revamping a firm’s supply chains, go-to-market program and purchasing strategies based on their unique business model and market environment.

Firms should approach operational hedging in a systematic fashion by: determining the vulnerable areas in the business (i.e. the cost and revenue drivers that are most impacted by large exchange-rate swings); considering various scenarios for currency-related risk impact (e.g. using multiple exchange rates over different periods); perform a sensitivity analysis on these drivers to determine the total business impact; and adopting operational hedging as a foundational risk-management strategy. In terms of operational hedging, strategic choices could involve evaluating the location of production facilities, sources of raw materials, pricing strategies, logistics networks, and how sales and marketing channels by geography are organized.

When deployed proactively and carefully, operational hedging can be a powerful tool to minimize the impact of major currency shifts on costs and revenues, while enabling firms to potentially leapfrog less-agile competitors. Managers need to be mindful that a proper operational hedging strategy may require significant time and investment to implement, whereas a steep decline in the dollar’s value could erode operating margins and competitive positions rapidly.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Cyberwar is here but are corporations prepared?

A recent article in Foreign Policy magazine is a wake up call for companies who are unaware of a cyberwar being waged right under their noses.  According to the author Joel Brenner, a retired intelligence official from the U.S. National Security Agency, criminals, hackers and terrorist groups are using the internet to target a variety of industries including IT, financial services, defence and electronics.  These attacks are launched for a variety of reasons including financial gain, IP theft, political disruption or merely just for kicks.  Cyber risks are rising so managers will need to understand and accept this reality and better prepare their organizations for inevitable disruptions.

So far, cyberwar has claimed many victims, some public but many private.  Most risks fall into two general areas:  information & IP security threats and operational risks

Information & IP security threats

Most weeks features disclosures of electronic fraud and massive data heists. For example, Sony’s PlayStation Network was hacked (apparently through its Amazon Cloud infrastructure), compromising the personal information of more than 100M customers.  In another case, cyber thieves stole $9M in just a few hours by breaking into an international bank, creating counterfeit credit balances and looting ATMs across 4 countries.  There is nowhere to hide from these threats. According to Brenner, “international gangs spread malicious code that conscripts unwitting computers into zombie armies of hundreds of thousands of similarly enslaved machines.”

Cyberwar pays.    It is often cheaper and easier to steal IP than it is to painstakingly develop it.   Brenner sees corporate espionage by both competitors and foreign intelligence services (or their surrogates) increasing. For understandable reasons around maintaining confidence and not admitting vulnerabilities, government officials are reluctant to speak openly on specifics while victims will rarely admit they have been targeted. Yet, two companies have gone public.  Google acknowledged that a 2009 Chinese government cyber attack was about stealing their market-leading source code.  Brenner asserts that thousands of other U.S. and Western firms were targeted by the same Chinese attack.  In another case, Oracle publicly admitted and successfully sued SAP for stealing some of its software. 

Operational threats

Virtually every company’s operations are susceptible to national infrastructure and supply chains disruptions.  Operational vulnerability has been illuminated by the impact of the Stuxnet computer virus on the Iranian nuclear program.  Having been introduced remotely or embedded in the firmware of the industrial control systems, Stuxnet caused the uranium centrifuges to go haywire, resulting in a major setback to the program.   While good news for world peace, this case exposed the harsh reality that operational espionage is a major threat to highly automated and capital intensive operations.  While it is believed only a top-notch intelligence agency could have developed the virus,  the code itself is now public increasing the possibility of copy cat attacks.   For every Western organizations, the national and trans-national infrastructure is the nexus of vulnerability. Attackers have numerous soft targets including the electricity grid, air traffic control, energy pipelines, water and sewage systems and railroad switches.  These systems are mostly electronically controlled and networked.  If an intruder can break into the right server electronically, he/she can remotely shut down production, redirect goods to the wrong location, and even unlock shipping doors – while leaving no record of ever having been there.

Western companies face a wide variety of cyber threats from all corners of the globe and within their own societies.  According to Brenner, seized al Qaeda computers have contained details of U.S. industrial control systems. A variety of terrorist groups have plotted attacks on the Australian and British electricity grids over the past 8 years. Countless numbers of individual hackers and small gangs regularly look to penetrate poorly defended IT infrastructures.  In fact, criminals can easily rent cyber weapons online, called “botnets,” to attack web sites.

How can managers deal with the onset of cyberwar?

  1. Acknowledge that their firms face serious operational vulnerability in an inter-dependent and wired world.   Organizations need an objective and realistic assessment of which assets, data and IP can and should be protected.  Moreover, managers must look back through their supply chains and equipment suppliers to understand the full impact of cyber disruption.
  2. Accept that risks cannot be eliminated, only managed.  As operators of over 80% of the IT infrastructure, it is the private sector who owns this vulnerability;  they can’t depend on a distracted, heavily indebted government to save them. Furthermore, companies must reconsider their primary focus on efficiency and invest more in operational redundancies in key areas such as business continuity measures, IT & communications support and data storage.    
  3. Understand that technology is only one, albeit the most obvious, aspect of the cyberwar challenge. Unless technology risk mitigation is integrated with people, process and operational elements, firms run the risk of not closing every window of vulnerability.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Strategy for risky and uncertain markets

The political turmoil in the Middle East over the past few weeks reminds us how risky emerging markets can be.  In rapid succession, Tunisia, Egypt, Jordan, Yemen and Bahrain have experienced significant unrest resulting in the destabilization of local economies as well as the foreign firms that operate and sell there.  Caught unprepared most multinationals across a variety of industries got hammered.  For example, Thomas Cook Group, a tour operator, announced that they would lose $32 million due to the Egyptian and Tunisian uprisings.  Lafarge, a large French cement provider, saw its share price fall four percent in one day.

Despite a semblance of normalcy, all emerging markets contain a myriad of risks – by themselves or in combination – ranging from war, civil unrest, and arbitrary government actions to executive abduction, natural disasters and large currency fluctuations. Magnifying the local hazards are fragile infrastructures, weak government institutions and socio-cultural chasms. 

Not surprisingly, political and economic risk is not limited to the Middle East.  Other rapidly growing flashpoints pose considerable risk for Western companies that depend on location operations and markets.  As examples, both Korean states technically remain in a state of war; nuclear-armed states India and Pakistan have fought 4 wars over the past 60 years and still have a simmering dispute over Kashmir and; China has territorial issues with all of its neighbors and experiences thousands of anti-government incidents every year.  For these countries as well as many others, disorder is not a question of if but when.  

In order to understand and cope with these risks, prudent executives need to consider three fundamental questions:  1) What is the likelihood of the most plausible disturbances; 2) What is the potential business impact of each of these problems and; 3) How can the company preempt these problems or mitigate the impact following the disruption.  To help firms make the right strategic choices, we deploy a comprehensive analytical framework that drills deep into the regional political and economic environment to develop integrated market and non-market risk management strategies.

Deeply understand the local society

Firms often have a great deal of knowledge about the customers, suppliers and regulations in the markets they operate in.  Yet, these same firms will possess significant cultural and historical blind spots which prevent them from truly understanding the pulse of the nation as well as its relations with its neighbors.  In the case of Egypt, virtually every multinational was caught unprepared by a situation that could have been anticipated given current political realities – extreme income inequality, religious conflict, a 30 plus year old authoritarian regime and political leadership behind a 82 year old dictator and his cronies.  To better understand their international markets, companies need to closely monitor political, social and economic developments both historically as well as up close on the streets. 

Choose a lower risk market strategy

Out of fear or ignorance, many firms choose to follow the market entry strategies of their competitors or peers. While executives may feel that they are playing it safe by replicating a rivals’ strategy, they are often unwittingly magnifying their own risk by ignoring better options.  For example, foreign direct investment (i.e. setting up a plant) may be an ideal approach during stable periods.  However, in turbulent times, an immobile and vulnerable fixed investment can turn into a corporate albatross.  Lower risk entry strategies could include joint ventures, strategic alliances, licensing strategies or in the simplest case, simple exporting. In addition, companies can choose to base vital assets like data centers and manufacturing in nearby but more stable geographies (Israel vs Egypt) while leaving less critical operations in the target market.    

Develop and refine contingency plans

Recent events in the Middle East as well as the Asian financial crisis of the 1990s have taught us that turmoil can spread quickly throughout a region. This means that managers need to anticipate potential problems and have plans ready before the crowds flood the streets. Companies should regularly engage in scenario planning where alternative operating models could be evaluated against key objectives like investment rate of return and supply chain viability.  Much of this planning should include non-market tactics such as political lobbying, coalition-building with your peers and participation in local associations and industry bodies.  However, firms need to tread carefully to avoid a nationalistic or religious backlash.  A case in point was the American conglomerate ITT who was implicated in the overthrow of Chile’s Allende government in the early 1970s.

Given the potential,  firms can ill afford to ignore doing business in emerging markets.   However, managers need to tread carefully and strategically manage their risk.

For more information on services and work, please visit the Quanta Consulting Inc. web site.

Chinese takeovers: A primer

The Chinese are coming to an industry near you. Flush with cash, confidence and heft Chinese firms are aggressively pursing takeover opportunities across the globe.  In 2010, Chinese firms accounted for about 10% of all global deals by value.  Given a strong growth trajectory and need for raw materials & technology, the Chinese are expected to increase their pace of foreign acquisitions in the coming years.  If your company is considering, a strategic transaction with a Chinese firm, you would be wise to consider the learnings of your Western peers.

A terrific article in The Economist magazine outlines the trials and tribulations of executives from 11 Western companies who have been acquired by or are in the process of selling to Chinese buyers.  Some of their key insights include:

  • Overall, the executives were impressed with the ambition and technical skill of their Chinese peers.  At the same time, there are doubts as to their ability to improve the acquisition’s performance and to operate an international business. 
  • Emotion and trust matter a lot to the Chinese and they will go to extremes to gage their counterpart’s integrity and intentions.  To break down barriers and attempt to secure a negotiating advantage, the Chinese will often embark on marathon negotiating sessions and ply their Western counterparts with copious amounts of liquor.
  • As most Chinese firms are state-controlled, there is a lingering suspicion that the Chinese engage in dirty-tricks tactics including bugging hotel rooms for information and supplying interpreters who are in fact corporate spies.
  • The Chinese favor large negotiating teams with opaque and fluid roles & structures.  It is often unclear who has authority and how decisions are arrived at.   Those interviewed felt that the ultimate arbiter was the government and not necessarily the people who were part of the negotiating team.
  • Given China’s size and complexity, there will probably be more than one government  voice in the transaction.  When competitive Chinese companies are interested in the same target, it is likely that the firm with the most political support will end up as the preferred bidder.  These dynamics are often hidden from the Western company until the last moment before an offer is submitted.
  • Once the “preferred bidder” has been anointed, it is not surprising for them to shower wads of cash on the deal, reflecting their very strong balance sheets and the amount of political capital committed to the transaction.  Again, it is common for a high-ranking government (or People’s Liberation Army) minister to directly change the terms of the transaction.

Integrating the acquisition is where most Chinese deals (and Western ones I may add) drop the ball. 

  • The interviewees reported that the Chinese usually did their integration homework and did not barge arrogantly into the acquisition – although they did gain control quickly.  Senior management was usually retained if only in well-paid honorific roles.  Firm names and legal status did not change – at the outset.
  • Not surprisingly, one area where the Chinese fall short in integration is their low supply of English-speaking managers who are experienced in international business. This tends to slow integration activities, push decision making back to China, and alienate existing management.  In the companies canvassed, most senior managers have or are considering leaving.
  • Over time, the business plans did change albeit slowly and indirectly as is the case of a natural resource company that switched its selling from the open market to a single  Chinese firm.  In another example, an acquired firm abruptly shifted its strategy from profit maximization to production maximization once the Chinese took over.
  • From a cultural and management perspective, Chinese and Western firms could not be more different. Core Chinese values include deference, opacity and consensus, which are often at odds with more individual-focused Western companies who prize frank discussion, rapid action and employee empowerment.  This tends to create misunderstanding, inertia and frustration on both sides.
  • Finally, most of the interviewees felt that the next generation of Chinese business leaders – those in their 30s and 40s with more business and language skills – would be more effective than the current cadre [sic].

For more information on our work and services, please visit the Quanta Consulting Inc. web site.

New market penetration: a passage to India

Growth-focused North American companies can no longer ignore India.   Traditionally known as a center for business process outsourcing, India is rapidly joining the ranks of the first world as a major market for consumer goods and services.

According to the IMF, India is projected to generate GDP growth of 9.7% in 2010 and 8.4% in 2011.  Much of this growth can be traced to burgeoning consumer demand.  According to Stewart Hall, economist for HSBC Securities Canada:  “India is essentially a high-growth economy.  It’s a story fueled to a large extent by domestic consumption.”    Domestic growth, according to the IMF, is being driven by a “low reliance on exports, accommodative polices and strong capital inflows.” 

There remains considerable room for economic expansion arising from strong economic fundamentals.  These include: growing urbanization, a large, young workforce, and an expanding service sector.  All of these factors are contributing to the emergence of a sizable, materialistic and ambitious middle class. According to McKinsey, the India’s middle class is forecasted to grow from about 5% of the population to more than 40% by 2025, creating the World’s fifth-largest consumer market.

 Given the opportunity, what factors should companies consider when crafting their Indian-entry strategy?

Understand that India is a country of contrasts – A week and fractured government and hundreds of millions of poor and illiterate people coexist with a dynamic management class and World Class technology.

Consider India’s diversity – India is unique in many ways:  home to 1.2B people, governed by 28 different states plus the federal government; possessing 24 official languages with hundreds of dialects; absorbs a myriad of religions, ethnic groups and cultures and; encompasses a variety of climatic zones ranging from the frigid Himalayas, to monsoon-drenched jungles.

Be wary of business challenges – Despite advances, India continues to score poorly on every “Ease of Doing Business” measure.  In most of the country, the infrastructure is inadequate and will be challenged to support future growth without substantial investment. Regulations and bureaucratic practices can vary dramatically between jurisdictions.  Corruption is rife and many local firms continue to enjoy tacit privileges not available to foreigners.

Get engaged locally – While your market entry strategy should be driven by the type of products and services delivered, firms need to cultivate an extensive coterie of local (private and government) contacts and business partners who can smooth market penetration and stick handle through government regulations.  Foreign companies must also be mindful of local sensitivities and customs and not appear patronizing or uncaring.

Consider new business models to serve consumers – Although national wealth has been growing steadily, meaningful disposable income is now only reaching the vast majority of people.  To reach these consumers, North American companies need to be creative about how to deliver useful products at significantly more affordable prices than their home markets.  Examples of the radical product innovation required include the $2500 Nano car and the recently announced $35 government-developed tablet PC.  Finally, expect incumbent firms to aggressively defend their market share.

Leverage India’s strengths as part of a larger regional strategy – With its British legal system, widespread use of English and strategic location, India can effectively serve as the hub of a larger South Asian network.

Be patient – Despite its riches, India remains a frustrating market for the uninitiated.  Market penetration and investment returns will require longer time horizons.  Moreover, developing the necessary trust with local parties will take a considerable amount of time and effort. 

For more information on our work and services, please visit the Quanta Consulting Inc. web site.

Two More Best Practices in Sustainability: Wal Mart and Rio Tinto

Earlier, we explored two companies, GE and Nike, that are considered ‘best in class’ when it comes to generating financial and environmental value from sustainability initiatives.  Below are two other leading firms in this area, according to research from MIT’s Sloan Management Review.

Wal Mart

Background

The World’s largest retailer of 7800 stores (and growing) has been at the forefront of implementing sustainability initiatives. Initially, Wal Mart focused on internal programs like greening their roofs and moving to more energy-efficient light systems.  Lately, the firm has turned its focus to greening its supply chain and encouraging it suppliers to follow its sustainability lead.

Some Key Strategies

In 2005, Wal Mart set ambitious goals of producing zero waste, using only renewable energy and selling only environmentally sustainable products.  They backed up these goals with one of the most comprehensive sustainability plans at the time.  As part of this plan, Wal Mart has pushed [sic] most of its large suppliers to switch to more green-friendly products and to track their environmental footprint.   In addition, Wal Mart is undertaking a wide-ranging product lifecycle analysis of its supply chain to identify areas with significant environmental and cost savings potential. For example, to hit its zero waste target the company is implementing a number of programs that improve inventory management, increase donations, and ramp up recycling.  Finally, Wal Mart is participating in a consortium along with academics, retailers, NGOs, suppliers, and the government in order to build a global database of product information.  This data will be used to develop an index for consumers to evaluate products based on environmental impact.  A centerpiece of this plan is the creation of a Sustainability Index which requires each supplier to rate their products based on sustainability criteria.

Results

Wal Mart’s efforts have yielded important savings.  For example, at Wal Mart’s behest Unilever switched to concentrated detergents in 2006 order to save packaging and reduce its carbon footprint. According to the firm, the packaging change has saved well over 80M pounds of plastic resin, 430M gallons of water, and 125M pounds of cardboard.   Importantly, Unilever’s packaging decision triggered a category shift to concentrated formats driving further savings.  For the future, Wal-Mart is aiming to turn its Sustainability Index into a global standard that measures and communicates the green footprint of a product, thereby becoming “a tool for sustainable consumption.”

Rio Tinto

Background

Rio Tinto is a big mining entity with a big environmental footprint.  For new projects, the company needs to win the backing of local communities, governments, and NGOs in order to reduce political, economic and brand risks and to deliver steady returns. 

Some Key Strategies

About a decade ago, Rio Tinto came up with the concept of working within countries and communities in order to operate in an environmentally respectful fashion. At the time, the company was developing a mine in Madagascar that was a source of contention.  The Madagascar government as well as NGOs were worried about threats to biodiversity and the local communit, given that the site was one of the last pristine regions on the island and a home to aboriginal people.  A plan was developed to protect the environment and create economic opportunities in the communities surrounding the project, including setting standards and goals for the company to meet. Key components of this plan include:  policies to protect biodiversity and water quality around mine locations; plans for the time mining operations would be over in order to prevent the emergence of “ghost towns” and; goals for greenhouse-gas emissions and energy use.

Results

As a result of this initiative, Rio Tinto has obtained what it calls a “social license to operate” in Madagascar thereby increasing overall corporate revenues and profits and improving their corporate reputation.  As well, the company also helped form the International Council on Mining & Metals, which encourages sustainable practices across the mining sector.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Maximizing the Potential of Outsourcing Engineering Work

Few companies today would hesitate to outsource routine operations like IT services and call centers, but farming out engineering and product development is another story.  And for good reason.  Many companies have failed to achieve the same results outsourcing core engineering and product work as they have with back office operations.  In other cases, firms are reluctant to lose direct and visible control over mission-critical activities versus non-core operations.

Engineering and product development are expensive activities, making up between 3% and 10% of revenues depending on the sector.  There are compelling reasons to outsource this kind of work to centers like Bangalore, Shanghai and Budapest.  For one thing, potential cost savings are significant considering that offshore engineers earn a fraction of their North American or European counterparts. Secondly, most foreign engineers (particularly in IT) are trained in the latest tools and methodologies as opposed to many North American engineers who have only been exposed to older techniques.  Thirdly, for firms operating under strict time constraints the ability to conduct round-the-clock development over different geographies is very appealing. 

Outsourcing engineering has been difficult for many firms. For one thing, this kind of work is complex, expensive and risky, challenging even under the best of circumstances.  Secondly, these undertakings require a high level of internal collaboration as well as regular interactions with customers and suppliers. This level of engagement is not always feasible when key activities are offshore.   Engineering work also relies on all parties possessing a sophisticated grasp of the English language, something that is not always easy to find outside of English-speaking countries.  Finally, ensuring good project management and governance is always difficult but even more so when your team is 10 time zones away.

Given the potential benefits, it is likely more firms will dip their toe into outsourcing sooner rather than later.  According to Booz & Co., engineering outsourcing is currently a $30B market but it is expected to grow to $150B a year by 2020. To improve a company’s chances of achieving outsourcing success, Booz has come up with five key success drivers:

1. Choose the Right Project

Initially, choose projects with the best risk/reward profile, where lessons can be leveraged into future projects and where a business case can be defined. 

2. Identify the Appropriate Business Model

Unlike a typical vendor-run or captive arrangement, firms should consider other forms of outsourcing business models that ensure sufficient control, IP protection and shared risk & rewards.  Examples include Joint Ventures and Build-Operate-Transfer arrangements.  

3. Team Up with the Right Vendors

Firms must thoroughly identify, analyze and vet only qualified vendors using criteria that go beyond price and reputation.  These other factors could include engineering talent audits, capabilities assessment and employee attrition analysis. 

4. Create Iron-Clad Performance Metrics

Given the important of the work, both parties must jointly choose and track key performance metrics through comprehensive and well articulated Service Level Agreements (SLAs).  Outsourcers must be able to identify SLA variances quickly and enforce corrective actions as needed.

5. Establish a Strong Governance Structure

A strong and aligned governance structure encompassing both parties and based on clear reporting lines & roles is the most important success driver in any outsourcing relationship.  Projects require senior,  head-office accountability and ownership as well as empowered vendor leadership who have the authority to solve problems quickly and effectively.  

For more information on our services and work, please visit the Quanta Consulting Inc. web site.

Two More Industries under the Gun: Packaged Goods & Engineered Products

A short time ago, we reviewed the prospects of two North American industries, IT and Retail Banking.  These sectors have had their share of challenges but can look to the future with some optimism.  Today, we look at the fortunes of two more global businesses with input from Booz & Co.

Packaged Goods – Retool Supply Chains

This industry faces a challenging future due to a confluence of factors.  On the delivery side, many firms will face increased cost and product pressures due to their supply chain’s inflexibility and uncertainty.  Simply put, current supply chains were built on yesterday’s blueprints.  They did not have to cope with high energy & transportation costs, expensive labor and raw materials, volatile exchange rates (which impact production economies) and uncertainty around environmental regulations. Environmental pressures may increase even further as governments around the world put a price on carbon emissions and establish new regulations on waste by-products.   Additionally, cross-market shifts in consumer behavior are making it harder to satisfy an increasingly fragmented customer base without reengineering the supply chain.  On the demand side, continued slow growth is forecasted due to shifting consumer needs brought about by demography and the appeal of lower cost value and private label brands. 

Going forward, firms will need to reengineer their supply chains to make them leaner, greener, and more adaptable to managing increasing fragmentation and complexity.  Production flexibility will need to improve in order to respond to sudden changes in demand and more efficiently deliver low volume brands. Moreover, firms will need to be ahead of the demographics and environment curve in order to quickly capitalize on rapid changes in consumer tastes and to deliver on the needs of an ageing population.  Finally, companies will seek to drive growth by:  increasing penetration of emerging markets; improving their product’s value proposition versus ‘good enough’ private label brands and;  continuing investments in brand-building activities.

Engineered Products – Globalization bites back

The recent recession has battered every company in engineering-focused industries such as aerospace, defense, automobiles and transportation.  A rapid, cyclical rebound may not be in the cards this time.  To deal with demand contractions, North Americans firms followed a survival strategy i.e. maintaining liquidity, structural cost reduction and portfolio pruning at the expense of sustained product and technology investment.  At the same time, recessionary effects were more modest in emerging markets.  For the first time, a significant amount of investment and household spending was directed towards lower cost, homegrown providers. As a result, these firms were able to build market share while continuing to invest in R&D, product development and supply chain capabilities.

Until now, many domestically focused NA engineered products companies did not have to compete hard for global business.  Now, NA firms will begin facing serious competition from EM companies.  For example, three of the world’s top five automobile-producing countries are in Asia (Japan, China, and South Korea). The Commercial Aircraft Corporation of China is developing an airliner to rival planes from Boeing and Airbus.

As slimmer and more focused NA firms emerge from their slumber, they will quickly need to figure out how to protect their home market against hungry, lower cost and increasingly more capable EM competitors.  No longer can NA companies claim superiority in areas like management expertise, manufacturing excellence or engineering skills.  In any event, these areas will not be sufficient by themelves to differentiate any firm in today’s global marketplace. As well, NA companies will need to improve their ability to penetrate growing yet unique foreign markets that now feature significant local competitors.  In these markets, decisions to outsource, partner or share technology will becomes much more more complicated.

For more information on our services and work, please visit the Quanta Consulting Inc. web site.