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Growing in Asia? Go for depth, not breadth

Shifting the strategic mindset to focus on market leadership instead of a widespread, sub-scale geographic presence may help.
Monday, October 24, 2016 - 05:50

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Even at slower growth rates, Asia accounted for some two-thirds of the 3.1% global GDP growth in 2015. China, albeit at a moderated growth trajectory, still achieved a respectable 6.9% growth.

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"Achieving scale across a diverse region like Asia is no easy feat. The Asian population of over 4 billion in 48 countries with diverse educational, economic and cultural backgrounds is a unique challenge." - Vikram Chakravarty

FOR two decades, emerging Asia has been a source of growth for multinational companies. Many companies have invested in emerging Asia via a land-grab strategy that broadens their territorial reach, so as to tap the avenues of growth that the region offers. However, despite topline growth, actual profitability could remain elusive.

Now, as global economic growth tapers off and the sheen of emerging Asia is beginning to dull, companies are feeling the pressure. Gross domestic product growth rates across Asia have taken a dip as the region and companies face challenges such as political instability, high levels of corporate debt, slow economic reforms and currency volatility.

With all this, is Asia still relevant to investors? The answer: It still is, and very much so.

Even at slower growth rates, Asia accounted for some two-thirds of the 3.1 per cent global GDP growth in 2015. China, albeit at a moderated growth trajectory, still achieved a respectable 6.9 per cent growth. Further, Asia's middle class is expected to exceed three billion people - nearly 10 times the current population of the US - by 2030. By then, Asia will account for 66 per cent of the world's middle class, with a strong disposable income that companies will look to tap.

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However, what needs to change is the strategy. And according to a new report Asia: Time to refocus by EY and Harvard Business Review Analytic Services, the land-grab strategy that worked 10 or even five years ago in Asia is likely obsolete and no longer viable today.

First, achieving scale across a diverse region like Asia is no easy feat. The Asian population of over four billion in 48 countries with diverse educational, economic and cultural backgrounds is a unique challenge.

Thus a one-size-fits-all market approach is unlikely to be successful.

To that end, companies are constantly driven to adapt their global or home products to different local customer preferences, and then establishing the right go-to-market and distribution models.

Yet, developing or tailoring new products to local demands needs significant investments, not just in R&D, but also in identifying, hiring and nurturing local managerial talent that understands the local market enough to drive the business forward.

At the same time, companies face stiff pressure from local competitors who have a visceral understanding of the local customers, are more nimble when reacting to nuanced shifts in the market, and are willing to operate at lower profit margins.

Therefore, companies with a sub-scale presence will find it difficult and expensive to compete. The issue is exacerbated when a company tries to maintain a sub-scale presence across multiple geographies.

It is thus worthy to consider shifting the strategic mindset to one that focuses on market leadership instead, rather than a widespread but sub-scale geographic presence.

History and economics have shown that the top two or three market-share leaders typically capture about two-thirds of available profits. Hence, having depth - and not just breadth - in a country or a category so as to dominate market share is critical to growth - and profitability.

EXECUTING THE CAPITAL STRATEGY

Buying into the depth-over-breadth argument is one thing; executing it is what matters. While we have seen a number of companies transitioning to a depth-over-breadth capital strategy in Asia, this is sometimes done on a reactionary basis, for example in response to external events or pressure from shareholders or activist investors, rather than stemming from a deep analysis of their business.

The challenge for companies begins with figuring out exactly how and where they should focus their capital and other resources, and where they should fall back.

Companies seeking a more proactive and measured approach can start by conducting a portfolio review to assess their ability to achieve market leadership and profitability in each of the countries and categories in which they compete.

Once that becomes clear, they should double down in priority countries by undertaking big transformative deals to boost market share quickly.

While there is nothing wrong with organic growth, it can be a slow-going process.

M&As and joint ventures, despite some complexities, can catapult a company into the top three by market share, if managed well. As with any transformation, a level of boldness and foresight is needed to take the leap ahead.

Companies will also need to consider right-sizing their go-to-market models, depending on their scale, category, channel configurations and strategic visions. As well, companies may need to revisit their cost structure to jumpstart a path to profitability.

The last approach - and perhaps one that is perceived as least pleasant - is a path to exit and limit losses on struggling or orphan businesses. This is when market leadership and profitability in certain segments are not realistic.

In these instances where companies need to shut down operations, write off the investment and move on, they should establish a dedicated divestiture team, so as to focus on making the exit as seamless and cost-effective as possible.

As the Asia economy matures, the investment story is shifting from one of "show me the promise" to "show me the money". Our clients are telling us that they now want profits in this demanding economic environment, with a capital strategy that delivers on the bottom line.

To that, depth and not breadth, will win the day.

  • The writer is EY Asean managing partner, Transaction Advisory Services.
  • The views in this article are those of the author and do not necessarily reflect the views of the global EY organisation or its member firms.
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