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Emerging Markets Lessons for business success and the outlook for different markets

Presenters: Amna ChahalSeemab HussainLessons for Business Success It is too expensive to collect information on all economic activity, so collection is based on surveys and sampling. As a result, accounts are full of estimates.In emerging markets, the indicators are less reliable than in developed world. Economic indicators do a good job in measuring economic performance. Economic Indicators include:GDP (Gross Domestic Product)Current account deficitShort-term capital account flowsBudget deficitInflationInterest ratesExportsExternal debt Foreign reserves Gross Domestic ProductThe total market value of all final goods and services produced within an economy in a given year. GDP forecasts are given great weight in many business plans but this can be misleading.The Economist has said: GDP should really stand for Grossly Deceptive Product.

Points to be considered while forecasting GDP:Rely on real GDP instead of nominal GDPLook at past trends and understand what drives growth or decline in GDPData can be subjected to later revisions.Data can be seasonally adjusted.Compare rise in countrys GDP with increase in its population.

ContinueGovernments can manipulate data to support their political agenda.Technologies advances often remain unmeasured.Growth can be driven by strong exports or strong government purchases.Does not count any underground economy.Understand the significance of the dominant sector.Current Account Deficit Current account is the sum of net exports of goods and services, net income received from investments abroad and net transfer payments from abroad.Current account deficit highlights currency weakness or potential changes in economic policy that might affect businessHow does a deficit arise and how might it affect currency values?How to overcome current-account deficit?Foreign Direct Investment (FDI)International BorrowingSale of Foreign Exchange ReservesShort-term Capital-Account FlowsCapital-account flows have become increasingly important as an indicator of potential dangers for local currencies in many emerging economies.Hot money is a popular name for short-term capital movements.These include investments in liquid assets like Treasury bills and bank deposits and may also include portfolio investment in stocks and bonds. Budget DeficitsA budget deficit is when expenditures are higher than revenue and is reconciled by borrowing or by printing money.It may lead to hyperinflation or if it accumulates future generations finance it by paying higher taxes.

How to overcome budget deficits? Central banks sometimes buy government securities (new issues and existing debt issues). This is called monetizing. Off -budget funds are another way of hiding deficits. Developed countries have them too, but they are common in most emerging markets. Deficit creation is not always bad A temporary increase in public spending to pull an economy out of recession is fine, especially if the overall government debt is within acceptable international standards.

InflationThe inflation rate is a measure of the percentage change in price levels in an economy.The consumer price index (CPI) is the most common indicator used to follow inflationary trends. It is being based on a basket of different goods and services used by typical household and is determined by governments.

Interest RateCentral banks are much concerned of inflation rates because if is exceeds the level of nominal interest rates, the real interest rate will be negative.Negative real interest rate discourages savings followed by less money available for lending and for spending on capital goods, which ultimately leads to a fall in living standards.

19ExportsThe structure of exports indicates the overall health of the economy. If an economy is heavily dependent on exports of commodities or semi-finished products, it is much more likely to be affected by swings in world prices.It is also useful to know where exports are heading.

Official reserves The official reserves of a country include all foreign currency and gold held by governments.Governments should have at least enough reserves to cover three months of imports.These reserves are used for currency interventions and to pay for any international obligations.

Currency interventionsExternal debt & Debt ServicingExternal debt includes debt owed by both private and public sector.The interest payments and repayments on external debt can be financed only by income earned from exports. Assess the ability of a country to service the debt. If potential debt repayment problem exists, economy can turn into a crisis.

Eternal dilemmas: Market entry, Corporate structure & Marketing Reasons for failure of firms to secure a strong position in emerging marketsNo commitment from top to long-term dominanceMinimal or no local presence Leaving distributors to run the businessFly in, fly out management of local marketsLeaving distributors without or with little supportLimited or no investment in marketing/ advertising Local Presence

Local presence is crucial to success.Companies need to have a local office focusing on marketing and sales.Dont rely solely on distributors.Underinvestment in local offices leads to under penetrating the market, especially when company is in an earlier business-development stage.

Corporate StructureMake sure CEO supports the emerging-market business.Make sure each region has its own boss.Dont give a developed market head the additional responsibility for emerging markets.Choose a good location for the regional officeConsider clustersGive managers operational freedomDont centralize the marketing and sales functionsLocalizing Building brand imageOpportunity to re-position products from lower market segments to higher market segments.Know customer needs.Foreign product is not always preferred.Re-design products according to demand.Keep purchasing power of locals in consideration.

Packaging must have local language written on it.Package size should be kept in accordance with affordability of locals. For example; tiny packages sold in poor parts of Asia and Africa.Reaching The Local MarketPoor distribution networks can contribute towards failure of many companies in emerging markets.

Distribution channels are often inefficient and full of potentially bankrupt partners.

Selecting the DistributorInterviewing potential candidatesVisiting their premisesChecking credit ratingTesting expertise in sales and marketingChecking word of mouth recommendationsChecking background of their relationship with other retailers and end-buyersChecking after sales serviceChecking their nationwide reach.To get it right , several important principles should be followed.31Control Over Distribution NetworkHave local staff working with distributor.Company may use their own fleet of vehicles.Place staff members within distributors organization.Appoint a key person in distributor's staff to deal exclusively with companys matters.Clear Communication Distributors should be clearly communicated about companys long term strategic business goals.Adapt Distributor to Companys Strategies Any marketing done by the distributor must be fully in tune with overall companys marketing message.

Price ControlAvoid pricing problems by creating public awareness about price standard.For example; Colgate advised consumers to come directly to company if they were unable to buy product at recommended price.Improving PerformanceKeep distributors focused on ways to deliver.They must not take business for granted.Training for Distributors Companies may train their trusted distributing partners to strengthen their weaknesses (like financial reporting or marketing). Relationship with DistributorThe ultimate goal should be the creation of genuine partnership that will lead to tangible and intangible benefits.Managing RisksManaging ReceivablesWorking with several distributors to diversify risk. If one collapses, not all the receivables go with it.

Working with several banks also diversify risk of bank collapse during economic crises.Issues :Collapse of distributorCollapse of distributors bankContents of Detailed ContractDuration of contractPricesTerms and conditions of salesRights to visit distributors premisesProtection against delivery delaysMarketing and facilities expendituresA cancellation clause for breach of contractAgreed place of arbitrationConclusionBe rationally decisive in selecting appropriate distribution channel.Sell through multiple channels, include more distributors in areas beyond distributors reach.Do not hand over key accounts to non trusted distributors.Dont ignore rural customers that can provide an edge.Franchises and flagship stores gives better control in market.Do not ignore local competitorsStronger market position makes easier to survive at lower prices.