Deloitte Study: Emerging Market Innovation

The management consultancy surveyed 446 top executives to profile business practices of U.S. companies in developing countries

By Reena Jana

"Everyone knows emerging markets are a big deal—they've got growing populations and growing wealth. And everyone is talking about 'innovation' as a way to tap into these markets," says Gary Coleman, global managing director of the Manufacturing Industry Group of management consulting firm Deloitte, referring to two of today's business buzzwords and how they affect each other.

"But the fact is less than 50% of top-tier executives of [developed-world] companies doing business in emerging markets say they're successful at meeting their operational and revenue goals," says Coleman. That's even after designing and marketing innovative products tailored for consumers in key developing markets such as China, India, Latin America, and Russia.

Coleman is sitting in a light-filled, glass-walled conference room at Deloitte's New York headquarters discussing the results of a new survey, Innovation in Emerging Markets. He previewed the study's findings at the World Economic Forum's annual meeting in Davos, Switzerland, in late January. Deloitte publishes the entire report on Mar. 14.

Three Timely Issues

The 23-page study, which yielded some surprising results, features data culled from an online survey completed by 446 C-suite executives from manufacturing companies in 31 countries. Although Deloitte won't disclose the list of corporations represented, 36% of the executives work for companies with annual revenues of $1 billion or more, 34% work for companies with annual revenues between $100 million and $1 billion, and 30% for companies with revenues under $100 million.

The questions focused on three issues of particular relevance to managers at global companies with operations in emerging markets today: 1) attracting and retaining talent, 2) managing risks, and 3) operational structures.

One of the most intriguing findings: the lack of rigorous and ongoing risk management strategies used by global companies with operations in emerging markets. "To me, it's newsworthy that even in the large companies we surveyed, only a small percentage conducted a 'very rigorous' risk review before entering an emerging market and followed up with regular assessments after that," Coleman says.

Risky Business

This is a surprise because it seems somehow counterintuitive. Nations in the developing world lack intellectual-property laws and are vulnerable to rampant product counterfeiting—dangerous conditions for developing proprietary technologies or inventive product design. Emerging nations also are known for unstable political environments and shaky, underdeveloped infrastructure systems (limited power lines and highway systems, e.g.) that can be knocked out by natural disasters such as monsoons.

But the report states that only 56% of all executives polled conduct a "very rigorous" risk assessment before opening a satellite office, a research-and-development lab, or another business operation in a developing nation. Only 45% of those stated that their companies continued to perform "very rigorous" risk assessments regularly, after establishing a presence in an emerging market.

Legal and regulatory risks were top of mind for companies who did complete any form of risk assessment, with 77% polled listing these as risks they analyzed, followed by typical business issues of supply chain (76%) and business continuity (72%). All of these risks are concerns for corporations around the world. Intellectual-property risk was another important concern for most of the executives surveyed (64%).

Assess for Confidence

"IP really is the most obvious risk when focusing on innovation, especially in emerging markets" says Coleman. Why? A lack of intellectual-property laws means that it's easier for other companies to copy new products. But perhaps surprisingly, risks related to the unstable political and natural environments of the developing world were not as much of a concern.