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Contents
Foreword Executive summary A wake-up call Locating demand: The search for growth New players, new rules: The new shape of competition Rethinking capabilities: The roadmap to success
Sizing the future: Assessing where and when to act Shaping the future: Seeding tomorrows growth Seizing the future: Operating at speed and scale
3 5 9 13 26 33
35 43 54
Conclusion: Windows to the future Methodology: Income and consumption forecasting References
65 67 69
Foreword
The search for growth opportunities in emerging economies is no longer a matter of choice; it has become a necessity. With short-term growth difficult to find in developed markets, emerging markets must be considered as more than an optional, longer-term bet. But making bets on the future, whether short-term or long-term, is an especially difficult challenge amid the persistent uncertainty, complexity and volatility in the global marketplace. In my conversations with clients around the world, I am struck by how todays business executives often find themselves struggling to prioritize their investments across the diverse set of growth markets in emerging economies. The questions I hear in boardrooms vary widely: Why arent we making profits in China yet? Is it too late to enter Brazil? How can we move faster to establish a foothold in Africa? The questions highlight a key factor in strategic growth planning: the importance of getting your timing right. Planning an effective global growth strategy across time horizons demands significant investments of time, effort and resources to assess market potential accurately and to build the requisite capabilities for success. Putting off such investments, waiting to see how markets evolve, is tempting in todays economic environment, and it may be the right decision. But this presents executives with a critical paradox: ongoing global economic change may lead businesses to shy away from action in the very markets that hold the key to faster growth. The longer firms hesitate, the greater the risk of missing out on opportunities, and the more challenging the competitive environment they will face when they eventually take action. I see two underlying factors at play. First, regardless of when and how growth returns to developed markets, the future map of global demand will look very different from that of previous decades. Fundamental shifts in income and demography are reshaping the landscape of global consumption. Predicting where and when the related market opportunities will arise is difficult enough; understanding how to grasp them is even harder. Second, I see a new constellation of competition being formed out of the market turbulence of recent years. This is due partly to the new economic and political relationships that are being forged, particularly between emerging economies. But I also see transformation in how businesses operate. The downturn has spurred improvements in the efficiency of global operations. New technologies and reconfigured operating models are allowing companies to create value more effectively and to build more direct and intimate connections with their customers. And these new business models, practices and capabilities draw from a more diverse pool of global players, characterized by important differences in strategic priorities, governance and culture. It is in the context of this dramatically altered landscape of opportunity and competition that this report, the work of the Accenture Institute for High Performance, calls for an urgent reassessment of the strategies and capabilities that will be central to achieving high performance in tomorrows global marketplace. Business leaders cannot allow change and uncertainty to paralyze their decision making. We hope you find the report insightful and stimulating and its recommendations both useful and actionable.
Mark Spelman
Global Head of Strategy Accenture
Mark Spelman
Executive summary
In the current global economic environment, executives fear that prospects for growth in many markets are patchy and vulnerable. With this fear comes a renewed search for pockets of growth in the global economy. We surveyed nearly 600 business leaders worldwide and found that 80 percent are focused primarily on high-growth markets in emerging economies to chart a more compelling path for the future. And with good reason. Household incomes in emerging economies will jump by more than US$8.5 trillion between 2010 and 2020nearly 60 percent of the global increase over this period, in real terms.1 As these incomes grow, so will consumption and demand. But many executives are not confident that their organizations are up to the task. Forty percent do not believe that their companies possess the strategic and operational capabilities to fully grasp the opportunities in emerging economies. The same proportion worry that they do not fully understand the competitive dynamics they will face. These doubts are not misplaced and may be exacerbated by the emergence of a rapidly intensifying competitive landscape, populated by new players with new capabilities. High-growth emerging markets are a fast-moving target. Companies must build powerful new capabilities to address this new reality. is yet to come. For example, many companies are pinning their hopes on China, the worlds most populous nation and one of its largest and fastestgrowing economies. Currently, 27 other economiesincluding Poland, Colombia and Turkeyhave a greater number of households with an annual income above US$30,000. But over the next decade, China will rapidly accelerate up the ranks, leaving only three economies with a greater number of households earning US$30,000 and above: the United States, Japan and Germany. This pace of change is not restricted to China: Mexican households in this income band are expected to boost their income by an additional US$340 billion by 2020, an increase higher than that expected in Germany. And in a richer income segment, households with an annual income of more than US$50,000, Turkey will see a total increase of US$380 billion, the highest of any emerging economy. As these examples demonstrate, the varying degree and speed of change across these markets make the size and timing of opportunities difficult to grasp. low-cost capabilities and deep local knowledge, as well as an increased role of relationships and government support. In this environment, with its wide range of players and broad variety of capabilities, many companies will face a challenge in pressing home their own competitive advantage.
1 We analyzed household income data across 64 countries (see Methodology on page 67 for details) which together accounted for more than 90 percent of global GDP in 2010. The income of the emerging-market households in our analysis will jump by more than US$8.5 trillion between 2010 and 2020.
Faced with the risk of squandering these opportunities, what can companies do to accelerate their efforts and avoid missing the boat? What are the specific capabilities they need to build in order to compete effectively and claim their share of future growth?
newly-empowered female populations. In this way, successful globalizers develop a more complete and realistic understanding of the markets in which they intend to operate. Second, in a rapidly-changing environment, these companies understand better than their competitors the importance of planning over time horizons, allowing them to sequence and prioritize their investments. Our research, conducted in partnership with Oxford Economics, illustrates the importance of identifying where different markets will sit in terms of their consumption of specific products and services. How close are they to reaching a point where demand rapidly takes off? How close are they to market maturity? What are the opportunities of different markets over different time horizons? This deep understanding of their target markets allows successful globalizers to become masters of strategic positioning: to be not only where opportunities are today, but where they will be tomorrow. Through their superior ability to discern the size, location and timing of opportunities, these companies make more informed decisions and trade-offs around where and when to invest, and remain several moves ahead of the competition. To become masters of strategic positioning, companies can: Conduct cross-country forecasts of product and service consumption across time horizons, beyond national and regional borders, and use these to evaluate trade-offs and guide decisions about when, where and how to enter high-growth markets. Some markets may offer immediate opportunities, while others may be poised for more significant growth in the longer term. Experiment with different customer segmentation variables to uncover new geographic and demographic groups. Discovering segments that cut across country borders may unearth business cases beyond those that focus exclusively on country-level segmentation. Procter & Gamble has designed razors, shampoos and cleansing products specifically designed for consumers in water-scarce areas.
Use information and communications technology (ICT) such as mobile phones and social media to collect reliable and relevant data, improve demand forecasting, and overcome data scarcity. Coca-Cola has 22 million consumers following it through social media, and the ensuing dialogue has given Coca-Cola valuable ideas for new beverages and other products. Leverage existing proprietary data for further growth opportunities: the Mexican retailer Grupo Elektra built one of the countrys largest networks of banking branches based on data from a credit service it launched for retail customers. Choose local partnerswhether through joint ventures, alliances or other arrangementsto gain a deep understanding of local market dynamics, needs and preferences. Enhance competitor analysis techniques to anticipate emerging competitors across multiple time horizons, from different geographies and adjacent industries.
To achieve a better understanding of how they can push open new windows of opportunity, companies can: Identify and map key stakeholders, local and global, and build trusted relationships. Assess the strength of relationships with government agencies, industry regulators and local communities. These relationships can help obtain a license to operate, ease the policy environment, and improve access to scarce resources. Executives may be surprised at the extent of common interests held by these stakeholders. Innovate to fulfill unmet needs, and involve local consumers in innovation and design. Vodafone and Safaricoms M-PESA money transfer platform was designed to address a particular need in Kenyan society, to send money to family at home. The service has grown quickly, achieving 14 million registered users within four years, and has simultaneously brought an entirely new business model to markets across the world. Evaluate local and global leaderships understanding of social and economic factors that influence demand, and promote the social and economic development of local communities. Companies successful in emerging markets engage national and local governments to help create the conditions needed for their businesses to prosper. GSK, a leading pharmaceutical and healthcare products company, reduced the price of its patented medicines in the worlds poorest countries, providing social benefits and opening up new markets.
companies to grasp the opportunities of today, but will play a fundamental role in shaping the markets of tomorrow. For example, our analysis shows how the power of disruptive innovation can transform industry dynamics, improving the accessibility of consumer products and creating markets. In the automotive sector, for example, process redesign and low-cost materials have dramatically broadened the accessibility of passenger cars to new customers. New pockets of demand have opened up for those companies with the agility and efficiency to design low-price business models. Successful globalizers are pushing the boundaries of what is possible: they understand that business performance and the bottom line will only become more important in geographic growth plans. They understand that operating at speed and scale will play an ever greater role in determining the winners and losers of the next phase of global competition. To achieve operational agility and seize new opportunities, companies can: Explore partnership and acquisition options to boost reach, capability and speed; and continually reassess and evolve ownership and governance structures as circumstances change. The flexibility of Starbucks in managing a range of business models and partnerships has been instrumental to its success in China, which the company now regards as its second home market. Develop systems to rapidly redeploy people, capital and ideas around the global organization. In expanding its global footprint, Tata Communications designed a wholly new international operating model to incorporate local leadership expertise into its global operations. Encourage experimentation incubate, fund and protect new ideas. The success of Indian pharmaceutical companies demonstrates the importance of innovation, and the benefits of scaling new ideas across the global organization. Assess the leadership team and how its skills and experience align with growth plans. Nestl is relaunching its
International Development Program, giving future leaders experience in foreign markets within the companys business units across the globe. No business decisions are simple in todays environment of prolonged global economic uncertainty. But a game of wait and see purely due to a lack of understanding or preparedness poses the risk of missing the boat. This report uncovers the key dynamics at play and details specific actions that companies can take to build the capabilities for success in the high-growth markets of the future.
The research
Accentures Institute for High Performance has conducted thorough research to investigate the keys for success in todays competitive highgrowth markets. The main elements of research include: Household income analysis, in collaboration with Oxford Economics. We created five standard bands of annual household income and, for each of 64 countries, estimated the number of households falling into each band in 2010, 2015 and in 2020. All forecasts are measured in real terms, and at market exchange rates. Industry consumption curves, in collaboration with Oxford Economics. This research forecasts the evolution of consumption for a select group of industries across the world. It also includes scenario-based sensitivity analysis to assess the impact of changes in the business and policy environment. A survey of 588 business leaders, across 85 countries and 22 industries, conducted by the Economist Intelligence Unit. Business leaders were asked about their perceptions of the competitive landscape, their companys plans for growth and the capabilities important for success in these markets. Conversations with clients and experts across industries and extensive secondary research, including company case studies and analysis of greenfield and M&A investment data.
A wake-up call
A world of opportunity
Faced with protracted economic uncertainty, many companies are renewing their interest in emerging economies as a springboard for their next phase of growth. Our survey of 588 business leaders reveals that 80 percent are looking primarily at emerging economies for their next stage of growth. And they acknowledge that this is where future opportunities lie, with 81 percent planning to increase their investment in emerging economies over the coming three years. We analyzed household income data across 64 countries that together accounted for more than 90 percent of global GDP in 2010. The income of the emerging-market households in our analysis will jump by more than US$8.5 trillion between 2010 and 2020. That represents nearly 60 percent of the total global increase in household incomes over this period (see Figure 1). In particular, China and India are projected to experience significant increases in total household income, with additional income of US$3.2 trillion and US$1.4 trillion, respectively. As emerging-market households spend this newfound income, fresh pockets of demand will emerge. Our research examined the evolution of income patterns globally, and how rising household incomes might influence consumption. For example, a combination of rising household income and a large population will propel China to be one of the worlds most significant passenger car markets: our estimates show that average annual car sales in China are expected to exceed 15 million by 2020, ahead of the United States. Already, in 2011, China has overtaken the US to become Roll-Royces largest market.2
Figure 1: Household income growth 2010-2020 (US$ billion, 2010 constant prices)
60,000 Developed markets Share of global growth = 43% Compound annual growth rate (CAGR) = 2.0% Emerging markets Share of global growth = 57% CAGR = 5.4%
56,700
55,000
50,000
35,000 Global income 2010 Emerging markets China India Russia Brazil Turkey Mexico Indonesia Other emerging US Japan UK Germany Other Global developed income 2020
Developed markets
Source: Accenture, Oxford Economics Note: The analysis covers 64 countries, which accounted for more than 90 percent of global GDP in 2010.
Emerging markets, however, is a nebulous term that obscures the diversity and complexity across those markets. South Korea, India and Vietnam are often cited as high-potential emerging markets to watch. Yet average household income in these markets diverges significantly; approximately US$35,400, US$5,800 and US$3,300, respectively, in 2010. The value of comparing a typical consumer across these countries is questionable, even when factoring in cultural differences. Headline numbers can also mislead. China, for example, is the worlds most populous country and home to one of the worlds largest and fastest-growing economies. Yet in 2010 it had fewer households with annual incomes above US$30,000 than many other smaller emerging economies, including Colombia, South Africa and Argentina. While attention is focused on the BRIC economies, we project that by 2020 Turkey will be home to an additional 4.7 million households in this income bracket, on a par with expected growth levels in Brazil. Mexico will also undergo rapid growth in its consumer-market potential: there will be an additional 3.3 million households in this segment over the decade to 2020. With so much variation and rapid change, the size and timing of opportunities can be challenging to grasp.
may be the most dangerous choice of all. The economic downturn has had a profound impact, dramatically reshaping the global competitive landscape. High-growth markets present many opportunities, but these opportunities are being rapidly snapped up by a new breed of players from emerging economies, as well as multinationals that have entrenched themselves in these markets during previous phases of globalization. The longer they wait, the more challenging competitive environment they will face when eventually taking action.
The growth prospects are clear. But it is also clear that many companies will feel locked out of the opportunity to become serious players in the market, even before it has taken off. This pattern is repeating itself in different industries and locations around the world. In some cases, the risk of being locked out of markets threatens deep and long-term consequences. The CEO of a large Chinese railway equipment manufacturer explained that the financial crisis weakened the ability of European and North American banks to finance large railway contracts demanded in Asias emerging economies. Chinese enterprises and banks partnered to fill the void. The CEO is confident that his companys products rival the quality of multinational competitors and will anchor rapid sales expansion in Asia: exports for the first half of 2009 increased by 60 percent over the same period in the previous year.3 The prospect of being locked out of such long-term contracts around the world should be a sobering thought for many companies. The intensity of competition is not all that has changed. The diversity of competitors, and of their competitive advantages, brings new challenges. In this report, we bring to light the fundamental shifts in the global business landscape that the downturn has wrought. We make clear the new challenges companies face in determining the optimal location and timing of opportunities, and the risk of delaying action in the face of aggressive competition.
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With almost three-quarters of business leaders believing that they need to accelerate their efforts in high-growth markets, it is critical to understand the dynamics that constrain their progress. Many companies may not appreciate the degree of change in the business landscape since the downturn. On the demand side, companies have not adjusted their methods to locate and measure demand and fully evaluate potential opportunities: their tools are often inappropriate, or even outdated and irrelevant. On the supply side, companies underestimate the diversity of players and capabilities they will encounter in the competitive landscape. Next, we explore these demand and supply dynamics.
73% of companies feel they need to accelerate efforts or may already be too late to build satisfactory market share in high-growth markets.
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A fast-moving target
We have conducted an extensive analysis, in collaboration with Oxford Economics, of household incomes and their evolution over the coming decade. According to our analysis, China lags behind 27 other economies, including Poland, Turkey and Colombia, in the number of households with an annual income greater than US$30,000. This comes as no surprise to companies eagerly and impatiently awaiting
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Figure 2: GDP per capita, 2010 (US$ at 2010 prices and market exchange rates)
8,000 7,000 6,000 5,000 4,000
Figure 3: Change in total income for households with annual income of US$5,000 and above, 2010-2020 (US$ billion, constant 2010 prices)
140 120 100 80 60
3,000 2,000 1,000 0 South Africa Source: Oxford Economics Egypt Ghana Nigeria Kenya Sub-Saharan Africa average 40 20 0 Nigeria Thailand South Africa Malaysia Egypt Ghana Kenya
However, Nigerias consumer-market potential will soon outstrip that of other African economies it lags behind today. By 2020, 7.8 million additional households are expected to have an income level of US$5,000 and above, with 12 percent of these earning more than US$30,000. This translates into US$130 billion of additional household income and an increase far greater than other African economies (see Figure 3). The income growth is also greater than that in burgeoning Asian economies, such as Malaysia and Thailand. The key driver of Nigerias rapid economic growth, and incomes, is the countrys expected fast population growth.
middle class is a loosely defined term and differs across markets. In some cases it is merely the middle of the income distribution. In others, it refers to a specific level of income. Either way, a middle-class household in India is unlikely to afford the deluxe refrigerator, high-end TV, smartphone and sport utility vehicle of a middleclass American family. These large discrepancies and ambiguities in the definition of middle class matter for companies trying to find the most attractive markets for their products and services.
the greatest opportunities lie. Some might be surprised at what they find. Significant opportunities exist in cities that many multinationals havent even heard of. Zhengzhou is a prime example. The capital of Henan province in China, Zhengzhou by 2020 will have a bigger economy than Sweden, Hong Kong or Israel.16 And Surat, in the Indian state of Gujarat, is forecast to be home to nearly 8 million people by 2020, more than the whole of Paraguay or Norway.17 One example of a company that has followed a city expansion approach is Xiang Piaopiao Food (XPP), which entered the Chinese beverage market in 2005 with a milk tea product. The market at the time was concentrated in Tier 1 and Tier 2 cities, but XPP avoided the high entry costs associated with these markets by focusing on 600 smaller cities, using traditional channels of local distributors. The company has achieved compound annual growth of more than 100 percent, with total sales from smaller cities and towns typically accounting for 75 to 80 percent of total sales in each province.18
Redrawing borders
Companies must take into account the most appropriate geographic units in strategic planning. For example, it may make sense to plan in terms of regions and cities rather than countries and continents. In China, for example, there are significant variations across provinces in income, demographics, religion, language and geography. By delving more deeply into their assessment of China and other large emerging markets, companies can create a more accurate picture of where
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Figure 4. South Africa income inequality scenarios: Number of households, 2020 (million)
7 6 5 4 3 2 1 0 US$0-US$5,000 Baseline income inequality Source: Accenture, Oxford Economics US$5,000-US$15,000 US$15,000-US$30,000 US$30,000-US$50,000 US$50,000+
it might mean that companies need to accelerate entry plans as demand for their product picks up sooner than they had expected. This example illustrates how changes in external factors may have an unexpected but significant impact on market opportunities and strategic planning.
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16
17
18
Figure 5: Additional households with annual income of US$5,000 and above, 2010-2020
1 to 5 million
0 to 1 million
Figure 6: Additional households with annual income of US$15,000 and above, 2010-2020
1 to 5 million
0 to 1 million
Figure 7: Additional households with annual income of US$30,000 and above, 2010-2020
1 to 5 million
0 to 1 million
1 to 5 million
0 to 1 million
Average household income (2008 US$) Source: Oxford Economics, Swiss Re, Accenture
Despite the attention given to fastgrowing emerging economies, for many of them the insurance market is still at an early stage of development: market penetration has yet to increase significantly. This does not imply an absence of growth opportunities. On the contrary, being positioned in a market as it is about to take off can give companies first-mover advantages, such as a strong customer base and brand. The timing, however, is critical because insurance has a long growth phase. Entering too early can be as damaging as entering too late. Institutional factors could stimulate demand ahead of expectations. In the Netherlands, for example, the market penetration rate is substantially above what one would expect from the countrys income levels. For an average household income of US$51,000 (the countrys average income) in 2009, the curve suggests that consumption (measured by
premia per capita) would be at US$680. In fact, it was around US$4,500. The difference is due to institutional factors. The 2006 Health Insurance Act created a universal health care system, in which all individuals were mandated to carry basic health insurance in the private sector, while the government subsidized low-income households.20 The countrys historic maritime links have created a strong tradition of insurance coverage, and the Netherlands is one of the worlds largest non-life insurance markets.
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car markets in Mexico, Slovakia and Turkey appear to be at similar growth phasesrapidly growing markets with car purchase penetration increasing faster than income growth. A maturing cluster of markets is also apparent further up the curve: in these countries, a change in income will induce a proportionally smaller change in demand. Companies can use these patterns and groupings to identify potential targets, similarities and synergies. For example, many countries that are approaching the rapid growth phase are also significant automotive manufacturing hubs. Mexico, Slovakia and Turkey are fast becoming hotspots for auto parts production and assembly21 and are attracting considerable investment.22 These markets
and their major trading partners may promise lucrative opportunities for the automotive sector, as well as for ancillary products and services. In maturing car markets, the next wave of growth may be in electric or hybrid vehicles. Although these vehicles still make up only a small proportion of total car sales, by aggregating similar markets, companies may uncover sufficient scale to build a profitable cross-country business case. The greatest value in consumption curves is their ability to forecast over time. By comparing market dynamics across time horizons and geographies, companies can paint more accurate pictures of where and when opportunities will arise. These comparisons anchor a more effective
prioritization of investments across target markets. For example, in 2008, the Thai market had not yet taken off. But between 2008 and 2020, the car stock is expected to nearly double to 103 cars per 1,000 people, and annual sales will average 560,000 cars (see Figure 11). By the same token, Turkey is further up the consumption curve and expects a much larger increase in consumption earlier in the decade. Penetration is expected to increase by an additional 82 cars per 1,000 peopleequivalent to annual car sales of 1.12 million. These examples illustrate the value of more granular analysis: some companies may need to prioritize todays investment dollars between building a longer-term position in Thailand and betting on Turkeys more immediate window of opportunity.
Illustrative consumption figures Cars per 1,000 people China Thailand Turkey Mexico Slovakia Croatia United States 27 54 92 181 272 346 451
Average household income (2008 US$) Source: Oxford Economics, World Bank WDI, Accenture
Illustrative consumption growth: change 2008-2020 Cars per 1,000 people Slovakia China Turkey Mexico Thailand Croatia 99 94 82 54 45 28 Average sales, annual 160,000 15,030,000 1,120,000 2,200,000 560,000 110,000
Croatia
Mexico Turkey
40,000
50,000
60,000
70,000
80,000
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New players
Internationalization has never been a simple journey. The ability to become relevant and respond to local needs in new markets has always been a fundamental challenge. A major obstacle is the strength of incumbents, with their deep local-level relationships, acute knowledge of local needs and preferences, and enviable customer loyalty. Business school case studies and media coverage are littered with praise for companies that have managed to effectively tailor their offerings to local markets. By the same token, companies unable to recognize and adapt to local circumstances are criticized. But companies looking to enter highgrowth markets today face a more complex incumbency challenge than ever before. High-growth markets have spurred growing levels of investment and corporate activity over recent years.
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Emerging giants
Already 117 companies from emerging economies are in the Fortune Global 500, a six-fold increase since 2000. This trend appears to be accelerating. Twenty-two emerging-market multinationals replaced their developed market peers on the list in 2011 (see Figure 12). The emerging-market companies are also quickly moving up the ranks. In 2011, 70 percent of the Fortune Global 500 fastest-growing companies (by revenue) were from emerging markets. Companies based in emerging economies often have an advantage in entering and expanding in high-growth markets. For example, they may be more familiar with serving low-income customer groups or operating amid infrastructure deficiencies. The size of the prize is evident, and the success stories are only increasing. Chinas fast-growing Chery, an automotive company, launched its mini car, QQ, in nearly 80 countries, most of them emerging economies. Chery is particularly successful in Brazil. In the first half of 2011, Cherys exports to Brazil reached 18,000 units, a quarter of its exports.23 The company has recently built a plant in Brazil to
meet the demand there and from other South American countries. Embraer, the Brazilian commercial plane manufacturer, reports record profits through sales of mid-size jets suitable for regional travel between emerging economies. SABMiller, a leading global brewer with roots in South Africa, recently built a brewery in South Sudan. The companys deep experience in emerging economiesit operates in 17 African countriesgave it the confidence to enter this unserved market, despite South Sudans severe infrastructure barriers. These examples of success in highgrowth markets by companies from emerging economies exemplify a broader transformation in the global business landscape: the sharp increase in business activity between emerging economies since the beginning of the downturn. China has displaced the United States as Brazils largest trading partner. China has also become Indias biggest trading partner, and the two countries have agreed to a US$100 billion bilateral trade target by 2015. But the story isnt just about China. Indias exports to Brazil increased more than tenfold from 2000 to 2010 and exceed those of Latin American economies such as Mexico. The journey to multidirectional trade
(see page 31) details this important shift and how rapidly intra-emerging market (E2E) trade has grown in just the past ten years to transform the global competitive landscape. As emerging economies increasingly dominate global trade and investment flows, it is only a matter of time before the world sees a new global map of talent, innovation and industry standards.
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60%
58%
56%
53%
51%
47%
2005
2006
2007
2009
2010
Developed markets
revenue from developed markets. In 2010, for the first time, the majority of Unilevers revenue was from emerging economies (see Figure 14). The company plans to increase this share to 75 percent by 2020.24 Companies such as Tesco in South Korea or Coca-Cola in Brazil have shown that being a foreign or Western company is certainly no disadvantage. These companies possess strong competitive advantages. Their established brand presence positions them well to attract talent and customers. They can also draw upon their regional and global networks and mechanisms to better identify and rapidly act on local opportunities. What matters for high performance is not a companys country of origin; it is the companys strategic and operational capabilities for success.
acquisition of Jaguar and Land Rover created a company with a range of high- and low-value offerings well positioned to compete at the opposite ends of the same market. With these offerings, Tata Motors can also cater to markets around the world at different stages of development. Such ventures can leverage their complementary strengths to rapidly build market share in home markets and form a springboard for global success. Some companies have used partnerships to develop entirely new offerings: Vodafone and Safaricoms M-PESA money-transfer service acquired 14 million registered customers within four years (see M-PESA: Creating new markets through innovation, page 44).
Capital, credit and corporate governance: The freedom to invest for the long term
Constraints on capital investment and difficulties securing credit have hampered growth efforts in the wake of the downturn. Firms backed by state capital and sovereign wealth funds, meanwhile, have benefited in this environment as they have been able to access investment capital largely unconstrained by the pressures on global capital markets. Consider the example of sovereign wealth funds in the Middle East, which have approximately US$1.7 trillion in assets under management.25 In 2010, as funds across the Middle East sought to diversify and invest in new high-growth markets, 49 percent of their investments were directed toward the Asia Pacific regiona significant leap compared with the 7 percent invested in the region from 2000 to 2008.26 Many of the fast movers into highgrowth markets have been those that have had the freedom to take a longer-term investment perspective. Ownership and governance structures
New rules
As the key players in global markets change, so do the pressures that shape the rules of competition. The location of a companys headquarters matters less than its ability to grasp opportunities while others watch and wait. The following three trends are increasingly shaping the competitive landscape.
Combining forces
Companies also have a greater appetite for cross-border partnerships across emerging- and developed-market economies, built through joint ventures, acquisitions and other models. These complementary capabilities, assets and strengths can create a formidable competitive force. Tata Motors
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play a role here, as certain models are less beholden to short-term shareholder demands. This freedom provides a distinct advantage in tasks such as product development or market planning. Of Chinas 54 businesses in the Fortune Global 500, 41 are stateowned. While the total number of stateowned enterprises in China fell from 159,000 in 2003 to 114,500 in 2010, the total assets of those under central government control rose from RMB 3 trillion (US$473 billion) to RMB 20 trillion (US$3,150 billion).27 And though many of Brazils large companies are publicly listed, most of them are familyowned. The majority of Indias giant conglomerates still hold family names, and family members serve on boards.
difficult to steal. Africa, for example, was emerging as a compelling growth opportunity for global banks just as the financial crisis struck. Since then, companies less affected by the downturn have taken advantage of Africas more open playing field and snapped up the most lucrative partnerships and acquisitions. For example, the Industrial and Commercial Bank of China recently acquired 20 percent of South Africas Standard Bank and formed a commercial partnership for corporate banking services.29 And Bank of China partnered with Togobased Ecobank, which operates widely across Africa, to facilitate trade and investments between Africa and Asia. Snapping up the most promising partners is a key advantage to moving fast in this sector.
high-capacity machines are equipped to wash traditional gowns. And when LG expanded into the Indian market with a television set featuring onscreen display in the regional languages of Hindi, Tamil and Bengali, the Sampoorna sold more than 100,000 sets in the first year of its launch.31 With opportunity and competition difficult to evaluate and predict, companies often hesitate to invest. It is not surprising that the majority of businesses believe they need to accelerate their efforts to build market shareor that it may be already too late. As companies wait, they fear that the windows of opportunity are shrinking. They know the opportunities lie in high-growth markets. They know they need to accelerate their efforts. But what exactly should they be doing? What are the capabilities they need to build in order to succeed in high-growth markets? The following chapters seek to answer these questions.
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Phase 1
Before 2002, the majority of global trade took place between developed economies. For example, just ten years ago, 47 percent of world exports excluded emerging economies completely. Exports between emerging economies accounted for just 15 percent of total exports in 2000. Emerging economies were largely perceived as sources of raw materials. The triad economies of the United States, Japan and the European Union determined the norms and rules of business. However, Chinas accession to the World Trade Organization in 2001 marked a turning point, opening up Chinas vast potential as an exporter, particularly of manufactured goods, to the rest of the world.
Phase 3
The third phase, heralded by the global downturn, is still under way. It is characterized by the resilience of exports between emerging economies. E2E exports have grown from the smallest component of global trade to the second-largest contributor to international exports, just behind D2D (developed market to developed market) exports. Our estimates suggest that if E2E exports continue to grow at the average annual rate they experienced from 2000 to 2010, they could overtake D2D exports by 2013.
Phase 2
From 2002 to 2006, E2E exports averaged 25 percent annual growth. By 2003, they overtook exports from developed to emerging economies, and by 2006 E2E exports overtook those from emerging to developed economies. Exports between developed economies remained the dominant component of global trade. But their relative share declined during this period, from 53 percent in 2002 to 38 percent by 2006.
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Emerging economies are becoming the key shapers of global trade and investment, both as sources and destinations. From being the smallest component of global exports only a decade ago, E2E exports have grown dramatically to become the second-largest contributor to international exports. Our estimates show that if E2E exports continue to grow at the average annual rate they experienced in 20002010, they could overtake D2D exports by 2013.
This transformed landscape of competition is characterized by a more diverse set of competitors and a more varied range of strategic motives and organizational behaviors. The implications are fundamental; from a new global map of talent and innovation, to new industry standards and norms.
Figure 15: Journey to multidirectional trade (LHS: Export value, US$ billion; RHS: Indexed export value, 2000 = 100)
18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010
Phase 1
Phase 2
Phase 3
440 420 400 380 360 340 Indexed export value, 2000 = 100 320 300 280 260 240 220 200 180 160 140 120 100 80
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Disappointed globalizers
We also looked at companies that are committed to growing in highgrowth markets but that have been disappointed by their performance to date. They are defined by the following characteristics: They are primarily looking at emerging economies for their next stage of growth. In the past three years, their company revenue and profits in high-growth markets have developed slower than they expected.
Successful globalizers
We looked at companies that have had a track record of successful performance during recent years and are also confident and committed about their future growth in high-growth markets. Specifically, they are defined by the following characteristics, based on their responses to our survey: They are primarily looking at emerging economies for their next stage of growth. They are planning to increase investment in their target high-growth markets over the next three years. They believe they have an accurate understanding of the size of opportunities in emerging economies. They believe they fully understand the competitive dynamics that they face in these markets. They believe they possess the strategic and operational capabilities to fully grasp those opportunities. In the past three years, their company revenue and profits in high-growth markets have developed in line with, or faster than, their expectations. In 2010, 61 percent of these successful globalizers experienced global revenue growth of 5 percent or more.
57% of respondents to our survey acknowledge that they need to reassess or fundamentally rethink their approaches and capabilities to compete and win in highgrowth markets.
33
Accenture conducted an extensive research program to investigate the keys to success in todays hypercompetitive high-growth markets.
The main elements of research include: Household income analysis, in collaboration with Oxford Economics. We created five standard bands of annual household income and, for each of 64 countries, estimated the number of households falling into each band in 2010, 2015 and in 2020. All forecasts are measured in real terms, and at market exchange rates. Industry consumption curves, in collaboration with Oxford Economics. This unique research maps the evolution of a select group of industries across the world. It also includes scenario-based sensitivity analysis that assesses the impact of changes in the business and policy environment. A survey of 588 business leaders, across 85 countries and 22 industries, conducted by the Economist Intelligence Unit. Business leaders were asked about their perceptions of the competitive landscape, their companys plans for growth and the capabilities important for success in these markets. Conversations with clients and experts across industries and extensive secondary research, including company case studies and analysis of greenfield and M&A investment data.
34
This deep understanding of their target markets allows successful globalizers to become masters of strategic positioning: to be not only where opportunities are today, but where they will be tomorrow. Through their superior ability to discern the size, location and timing of opportunities, these companies make more informed decisions and trade-offs around where and when to invest, and remain several moves ahead of the competition.
One way to build this understanding is through in-depth analysis of consumption curves for companies products and services. By analyzing consumption curves, companies can identify the optimal entry point for a particular target market. For example, in our analysis In focus: Consumption curves (see page 23), we see that the non-life insurance market has a long growth phase. Entering too early can be as damaging as entering too late. This type of analysis also offers clues to appropriate routes of entry. For example, in a country where demand is still in its infancy, companies have more time to build partnerships with local players and gradually cultivate their customer base. In a more mature market, entry through acquisition might be more attractive. Cross-country consumption forecasts can also identify countries at similar stages of market development. Such insights open opportunities to share lessons across markets and to build scale and synergy into market entry plans. For example, our analysis shows that Mexico, Slovakia and Turkey are on the cusp of rapid demand growth for passenger cars. Successful globalizers recognize that superior market assessment capabilities, such as analysis of household incomes and product consumption curves, give them an edge. For example, 75 percent of successful globalizers said that looking at the size of potential consumer purchasing power is critical for growth. Among disappointed companies, only 42 percent had similar feelings. We now look at some of the specific ways in which successful globalizers differentiate themselves and build an in-depth understanding of their target high-growth markets.
75% of successful globalizers said that looking at the size of potential customer purchasing power is critical for growth, compared with 42% of disappointed globalizers.
36
France Telecoms Orange brand is another example. As the firm analyzed strategic segments across its African and Middle Eastern markets, it found that, regardless of nationality, consumers share a need for very lowcost, easy-to-use telephone services. In response, Orange launched innovative services such as Bonus Zone, which offers special prices when network traffic is low. For the illiterate, Orange launched Voice SMS, a service for short voice messages offered at the same price as an SMS. Orange discovered a specific consumer segment for this service that spans Botswana, Cameroon, Cte dIvoire, Egypt and Madagascar.35 Procter & Gamble (see Procter & Gamble: Designing for the $2-a-day consumer, page 36) has identified new market segments through similarities in living conditions. The company has focused on products that address consumer challenges in water-scarce areas: razors that require less rinsing, for example, or detergents that are effective with minimal water. As water scarcity becomes an ever-greater global challenge, this segment may offer further opportunities to scale the business around the world.
37
Figure 16: Segmentation techniques that create customer groupings that are relevant within and across high-potential markets (percentage of respondents)
Successful globalizers
82% 78%
71%
12%
Disappointed globalizers
64% 45%
40%
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100%
Figure 17: Criteria used to group target high-growth markets when conducting strategic planning (percentage of respondents)
75% 54% 42%
18% 9% 7%
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Successful globalizers
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38
Successful globalizers
70%
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63%
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participants.37 Followers give their reactions to new productssuch as Kuat, a drink based on the guarana berry, a local favorite. Favorable consumer response has led to increased crop investment in anticipation of growing demand.38 Consumers also propose new juice flavors, such as the new cashew-flavored Minute Maid. This strong and loyal following has also stimulated growth in other divisions of the company. For example, the CocaCola clothing brand has become so popular that Brazilians are willing to pay up to US$200 for a pair of jeans. Companies can combine the power of technology with the insights of their local partners by equipping them with simple, easy-to-use mobile devices. Hindustan Unilever gives its rural distributors a user-friendly mobile application so they can transmit stock level and pricing information. Unilever then uses the information to manage inventory and predict demand. Improved demand forecasting has helped Hindustan Unilever to increase rural store sales by nearly a third.39
39
40
41
On tomorrows agenda
Conduct cross-country forecasts of product and service consumption across time horizons, beyond national and regional borders, and use these to evaluate trade-offs and guide decisions about when, where and how to enter high-growth markets. Experiment with different customer segmentation variables to discover new geographic and customer grouping options. Use information and communications technology, such as mobile phones and social media, to collect reliable and relevant data to improve demand forecasting. Assess the value of existing proprietary data and seek potential to leverage it for further growth opportunities. Choose local partners, whether through joint ventures, alliances or other arrangements, to build a deep understanding of local market dynamics, needs and preferences. Enhance competitor analysis techniques to anticipate emerging competitors across multiple time horizons, geographies and adjacent industries.
Figure 19: Anticipating and evaluating new competitors from other industries and markets (percentage of respondents)
81%
79%
12%
Disappointed globalizers
74% 58%
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100%
42
43
44
90%
81%
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69% 54%
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Companies are already seeing the benefits of this strategic focus and investment: 83 percent of successful globalizers believe that they have already established strong relationships with local stakeholders (see Figure 21).
83% of successful globalizers believe they have established strong relationships with local stakeholders, compared with 47% of disappointed globalizers.
Figure 21: My company has established strong relationships with local stakeholders (percentage of respondents)
Successful globalizers
83%
Global average
61%
Disappointed globalizers
47%
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Figure 22: Importance for growth: New sales channels to reach previously excluded customer groups (percentage of respondents)
Successful globalizers
63%
Global average
50%
Disappointed globalizers
47%
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On tomorrows agenda
Identify and map key stakeholders, local and global, and build trusted relationships. Assess the strength of relationships with government agencies, industry regulators and local communities. Innovate to fulfill unmet needs, and involve local consumers in innovation and design. Evaluate local and global leaderships understanding of social and economic factors that influence demand, and promote the social and economic development of local communities.
Figure 23: Importance for growth: Strategy and process design that ensures environmentally and socially sustainable growth (percentage of respondents)
Successful globalizers
82%
Global average
69%
Disappointed globalizers
68%
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As part of our research with Oxford Economics, we conducted scenariobased sensitivity analysis to understand the impact of business and policy changes on market penetration. The scenario presented in Figure 24 shows the potential impact in Chile of policies designed to increase broadband coverage and Internet accessibility. In our baseline scenario, we assume that rising household incomes increase broadband demand from eight subscribers per 100 people in 2008 to 15 per 100 in 2020. Effective policy interventions can boost this even further. In many ways Chiles digital economy is ahead of its peers. It has a focus on government e-services and high social media penetrationbut significant limitations still exist. For instance, the governments broadband review found that 20 percent of Chilean households, particularly in rural areas, are not covered by any fixed broadband network.62 We then posed the question: what would happen if broadband coverage were brought to all Chilean households?
Potential curve
Baseline curve 19 15
Average household income (2008 US$) Source: Oxford Economics, Accenture NB: The potential curve diverges from the baseline at higher average income levels because the model assumes that higher average incomes translate into increased computer ownership and therefore increased demand for broadband.
49
Average household income (2008 US$) Source: Oxford Economics, World Bank WDI, Accenture
Our results suggest that improving access to the Internet could boost broadband subscriber rates by around 25 percent, from 15 per 100 people to nearly 19 (see Figure 24). This is equivalent to an additional 650,000 subscribers. In practical terms, this change could be brought about through public and private collaborative investment that enables more households to connect to the Internet. Recognizing the massive potential that Internet access holds for the economy, the Chilean government recently commissioned a strategic review of broadband policy. The goal is to identify potential measures that eliminate the countrys coverage differentials and strengthen broadband takeup.63 Companies in Chile have the opportunity to work with local governments and other businesses to shape the institutions, infrastructure and standards that will govern future industry dynamics. The benefits of collaborative investment extend far beyond the creation of a new customer base for service providers. Improved internet access can transform
the business landscape. A significant number of small businesses would gain access to new technologies, such as cloud computing this would provide a boost to innovation and entrepreneurship. It would also open up new channels to customers, including overseas markets. South Korea has developed one of the worlds most advanced broadband networks through the governments long-term commitment to and collaboration with the private sector. South Koreas Information Infrastructure (KII) Plan was initiated in 1994 and designed to connect 84 percent of households to broadband services with speeds of up to 1 Mbps by 2005. The plan combined government support and private-sector investment. Specifically, the KII-Private phase of building the network for households and business included private-sector investment of US$14.5 billion. That investment was supplemented by US$1.76 billion of government loans between 2000 and 2005.64 The near-ubiquity of internet access has enabled South Korea to become a world leader in market sectors such as online games.
Swedens success in deploying a fast and wide network was supported by tax breaks for infrastructure investments and directly subsidized rural deployment to the tune of US$800 million.65 The countrys new broadband strategywith a target of 90 percent coverage at 100 Mbps average speed by 2020reflects the collaborative nature of the plan: a joint challenge with different roles for different players.66 Figure 25 illustrates how progressive broadband policies in both Sweden and South Korea have allowed subscription rates to shift measurably away from the global curve, effectively boosting consumption. Businesses across industries have been able to benefit from these initiatives. Proactive engagement in policy development and infrastructure building can have a very real impact on business opportunities by increasing and bringing forward demand.
50
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Figure 26: India passenger cars consumption curve: Disruptive innovation scenario
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35
C
2020 Curve constant car price
A 50% price reduction could potentially translate into 25% higher car sales.
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Investment in disruptive innovation is a big commitment. But the rewards are tantalizing. Some automotive players have already started to open this window of opportunity. The Renault-Nissan alliance is launching a low-cost car project in India, led by Grard Detourbet, the head of the global Logan program.72 South Koreas Hyundai Motor Company is investing in India, including a research and development center, to make India its global hub of low-cost, small-car production.73 Tapping into Indias demand is more complicated than it might appear. Finding the right mix of price and product features that would induce Indian consumers to trade up requires technological investment and a deep understanding of local needs. Success also relies on building a robust business case that incorporates the additional costs of research and product development into a low-margin, high-volume sales plan. This is a high-risk, highreward opportunity. But for some companies, the risk of missing the opportunity altogether may be higher.
Lessons from the small-car segment extend beyond emerging economies, and so will the benefits. Many consumers in markets that have traditionally favored larger cars, such as the United States, are downsizing to cheaper cars that combine fuel economy with the features of larger cars. Fords small cars, the Fiesta and Fusion, set sales records in 2011.74 Companies in mature markets also have an incentive to support the sale of low-cost, small cars that meet new fuel-efficiency standards. For example, in the United States, automotive companies have committed to doubling the average fuel economy of their fleets by 2025.75
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53
83% of successful globalizers believe they can keep up with the pace of change in high-growth markets, compared with 47% of disappointed globalizers.
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Figure 27: Rapid mobilization of people around the global organization (percentage of respondents)
78%
73%
Disappointed globalizers
75% 43%
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Figure 28: Rapid mobilization of capital to different parts of the world (percentage of respondents)
Successful globalizers
72% 71%
62%
Disappointed globalizers
56% 43%
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Figure 29: My company has sufficient access to investment capital (percentage of respondents)
Successful globalizers
77%
Global average
55%
Disappointed globalizers
36%
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Figure 30: Structures and processes to share and scale successful innovations across high-potential markets (percentage of respondents)
82%
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64% 49%
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through a deep understanding of Chinese tastes and preferences. Today, Yum! Brands, KFCs parent company, cites the focus on local leadership as a key element in the success of a business that generated US$4.1 billion in revenue in China in 2011.88 Successful companies also recognize that operating across diverse and fast-growing markets demands a variety of decision-making styles. They acknowledge this more readily than other companies. They are also far more likely to invest in building leadership teams that can easily reconfigure their composition to meet complex demands (see Figure 33). Some leaders have chosen a networked approach rather than one that is process-driven. In order to address high-priority concerns, for example, international hotel chain Four Seasons has established new global
cross-functional committees on issues such as leadership development and product innovation. These committees connect business units and move beyond siloed lines of command toward a model that puts the right people in the room with the right information to make decisions. Whatever model is used, it must provide the flexibility to adapt to and keep an eye on the future shape of the organization.
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Figure 32: Leadership teams that possess a diversity of perspectives and experience (percentage of respondents)
91%
88%
Disappointed globalizers
89% 72%
40%
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100%
Figure 33: Leadership teams that easily reconfigure their composition and decision-making style to meet growth-market needs (percentage of respondents)
89%
77%
Disappointed globalizers
73% 43%
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62
On tomorrows agenda
Explore partnership and acquisition options to boost reach, capability and speed, and continually reassess and evolve ownership and governance structures as circumstances change. Develop systems to rapidly redeploy people, capital and ideas around the global organization. Encourage experimentationincubate, fund and protect new ideas. Assess the leadership team and how its skills and experience align with growth plans.
Figure 34: A corporate culture that embraces uncertainty and change (percentage of respondents)
85%
77%
Disappointed globalizers
73% 47%
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63
64
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66
Scenarios
Scenarios were developed to test how consumption curves might change and how they might be shifted by targeted business and/ or policy action. Output from two scenarios, passenger car market and broadband penetration, was presented in the main body of the report.
67
In the alternative scenario presented in the report, we test the impact of a 50 percent price reduction. Consumption analysis explores the relationship of a given good versus others in the consumer basket. Typically, the impact of a price change on demand can be decomposed into the substitution and income effects. The substitution effect arises because of the relative price change, since a price drop makes cars more affordable relative to other goods and consumers are encouraged to trade up from their current transport mode. According to the academic literature, the price elasticity of the car stock to price changes is around 0.11 (for example, Johansson & Schipper, 1997).91 However, it is likely that a large price drop would trigger a more significant response in demand. This is particularly true in emerging economies, where the passenger car stock per capita is still very low. To account for this impact, we increased the price elasticity in our scenario to 0.3. Studies that look at price elasticity in the context of large price drops are rare, so our assumed elasticity of 0.3 lies just above the upper estimate suggested by most academic studies. The income effect means that household purchasing power has increased as a result of the price drop. For example, a 50 percent price fall in a good that represents 20 percent of the average households consumer spending implies a rise in real income of 10 percent. So although the households average nominal income hasnt actually changed, the price drop simulates the same effect as an income increase. We might usually assume that the share of vehicle purchases stays in line with the households share in the consumer price index (CPI) bundle. But our scenario assumes a disruptive innovation whose impact is to bring about a significant shift in household spending patterns, increasing the share of household spending on cars at the expense of other items in the consumer bundle. To account for this change, we assume that vehicle purchases rise to 10 percent of household income.
Broadband penetration
Using Chile as a case study, our baseline consumption curve for 2020 incorporates the impact of rising household incomes and improvements in the average speed of fixed-line broadband from around 2 Mbps to around 15 Mbps. This is based on recent market trends that suggest a brisk pace in broadband speed improvements around the world. Although improvements in speed increase penetration rates, access (as indicated by maximum coverage) is also important. In Chile broadband penetration is limited by access restrictions20 percent of households are not covered by any fixed broadband network. The Chilean government has announced its intention to work with business to widen broadband access to all households. To capture this, in our alternative scenario, the maximum penetration rate in the broadband consumption curve is increased from 45 subscribers per 100 people to 65 subscribers.
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Acknowledgments
Core research team
Rob Hayward, Armen Ovanessoff, Athena Peppes, Kuangyi Wei
About Accenture
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