“The balance is shifting” by Cirilo P. Noel (October 31, 2011)

Business World (10/31/2011)

The world is constantly changing, characterized by the volatility and unpredictability of today’s complex business environment. Recent global events have placed the world economy at a turning point. These events demonstrate just how fragile and interdependent the world’s economic system is. The ongoing sovereign debt crises in Europe, the US debt woes, and other similar crises have increased volatility and uncertainty in the Western world. On the other hand, fast-growth economies in Asia, Africa, the Middle East, Latin America and Eastern Europe are rapidly becoming the engines of the global economy. In fact, these economies already form almost half of the global GDP, and in 2010, contributed 70% to overall global growth. It is projected that by 2050, fast-growth economies will account for 65% of the global economy, in stark contrast to developed markets which are still struggling to recover from the global recession. With the center of consumer and business gravity shifting from advanced to emerging markets, the balance of economic power is clearly tilting away from countries that have dominated the global playing field for decades.

Seeing the need to understand this shift better, Ernst & Young recently convened a Global Growth Forum in Washington, DC. The forum engaged senior global executives and economic experts from the US government, the World Bank and the International Monetary Fund in a discussion regarding the reversals of fortune happening in today’s economic reality, and how businesses can succeed in it. The forum’s insights underscored the current unpredictable and change-driven environment. Organizations in both emerging and developed markets need to look at fundamental changes in their business model, because the very nature of globalization has changed. Multinational companies can no longer rely on the traditionally linear approach of building from export sales to overseas manufacturing. Now, multinational companies must be multi-dimensional, focusing simultaneously on far-ranging markets and customers, a diverse work force, efficient and adaptable supply chains, and relationships with governments and communities at all levels. Flexibility and agility need to become part of a corporation’s DNA. Challenging the status quo, and thinking innovatively must become the new operative principles.

Risk perceptions between developed and fast-growth markets are also shifting. In the past, investors demanded a much higher return when investing in fast-growth markets as a form of protection against the risk of default. But in the wake of the financial crisis, these risk/reward ratios have been turned upside down. Fast-growth economies are now being perceived as being less likely to default, particularly given the debt issues in several developed countries. A major reallocation of financial assets from West to East is increasing. Capital flows into emerging markets will increase, bringing with them corresponding volatility and a move to consumption-driven growth. This means that, for companies to sustain growth, they need to gain footholds in fast-growth markets early, to establish market presence and gain market share.

Additionally, companies should ensure that enough long-term funding is available to weather any potential weakening of credit conditions. In the Philippines, the new Internal Capital Adequacy Assessment Process (ICAAP) issued by the Bangko Sentral ng Pilipinas can help companies identify their risk profiles, assess capital adequacy relative to these risks, and implement forward capital planning to sustain business growth.

Companies also need to play an active role in creating demand. Min Zhu, deputy managing director of the International Monetary Fund, noted during the forum that only 19% of financial assets are invested in emerging markets, offering possible growth opportunities for multinationals. But with many fast-growth markets just beginning the shift to increased domestic consumption, companies should not expect significant returns quickly, but should anticipate a long-term approach to strategic market share acquisition. At the same time, given the stiffer competition due to potential downturns in developed economies, companies need to reintensify their efforts to market their products and services. Operating across both markets, under widely varying business conditions, is something that companies must learn in order to stay competitive. And they must do so swiftly and decisively.

The insights shared at the Global Growth Forum also indicate the likelihood of slowdowns in growth along the way. Companies should be prepared to ride out volatility and be willing to invest in the long term, although it is possible to mitigate some of these effects by updating risk assessments of fast-growth markets and focusing on the current, intensely competitive business landscape. They should also take into consideration the role of governments. As fast-growth markets transition from infrastructure-driven growth to consumption-based economies, governments will need to strike a balance between autonomy and control. Multinationals should also consider the increasing competition from local companies riding the economic wave.

One other area that companies need to reevaluate is talent management. Clear differences in strategy reflect varying realities of talent markets around the world. With language, culture and consumer behavior varying among different emerging markets, companies should consider the benefits of developing or acquiring versatile talent resources, whether hiring locally or training these up internally. They should also increase the diversity of management teams so that they better reflect the breadth of the company’s geographical footprint. Developing leaders and maximizing the effectiveness of the management team is viewed as an event rather than a long-term strategic program that requires commitment, and accountability at the top.

At SGV, celebrating diversity has always been one of our core principles. We’ve found that the synergy of different talents, perspectives, and disciplines can forge strong teams where innovation and effective collaboration flourish. The firm’s leadership is committed to improving the organization’s leadership development program, with partners as stewards of the firm.

Ultimately, there are no absolutes in businesses. Every company will need to navigate its own way through the stormy seas that seem to characterize today’s business environment.

The need for the coordinated interaction of diverse parts within the organization cannot be overemphasized. Companies who, like the explorers of old, venture boldly out in search of “new worlds” may discover that smoother sailing can lie ahead.

(Cirilo P. Noel is the Chairman and Managing Partner of SGV & Co.)

This article was originally published in the BusinessWorld newspaper. It is for general information only and is not a substitute for professional advice where the facts and circumstances warrant. The views and opinion expressed above are those of the author and do not necessarily represent the views of SGV & Co.