how leading indicators keep you ahead of the curve in emerging markets

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How Leading Indicators Keep You Ahead of the

Curve in Emerging Markets

A Complimentary Webinar from Aurora WDC

12:00 Noon Eastern /// Wednesday 8 June 2016

~ featuring ~

Joel Whitaker Derek Johnson


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Joel Whitaker

Joel Whitaker is Senior Vice President and Global Head of Research for Frontier Strategy Group. He is responsible for research strategy, product innovation, thought leadership, and advising FSG’s most senior client executives. FSG researchers counsel multinational executives on doing business in emerging markets around the world, providing economic forecasts, scenarios, and management best practices for Latin America, Asia, Eastern Europe, the Middle East and Africa. Joel’s analysis has been featured in The Wall Street Journal, The Financial Times, CNBC, Al Jazeera, and Harvard Business Review.Throughout his career, Joel has provided research-driven guidance to senior decision-makers with international responsibility. Prior to joining FSG, Joel was Head of Asia-Pacific Research for Corporate Executive Board (CEB), based in Singapore. In that role, he advised C-level executives across Asia on talent management, compliance, and salesforce effectiveness practices. Previously, Joel led CEB’s global research programs for leaders in information technology, R&D, strategic planning, and corporate development.Outside the private sector, Joel launched the Center of Innovation for Science, Technology and Peacebuilding at the US Institute of Peace, a Washington, DC-based think tank focused on international conflict management. He serves on the advisory board of TechChange, a startup that trains leaders to leverage technology for social change. Joel holds a BA in Economics and Politics from Oberlin College, where he serves on the President’s Advisory Council.

Email: [email protected]

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How Leading Indicators Keep You Ahead of the Curve in Emerging Markets

Joel Whitaker, Global Head of Research


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Learning Objectives

1. Learn how to select and track leading indicators of the drivers of your business

2. Understand which leading indicators are expected to rise, fall, and experience volatility in the coming year

3. Adapt a short list of industry-relevant leading indicators from agile companies in the consumer products, industrial, and health-care sectors


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FSG’s research approach

Global Business Environment MNC Executive Workflows

• Emerging markets expertise• On-the-ground insight• Economic linkage analysis• Proprietary data forecasts

• Implications for action• Executive and expert network• Global/local best practices• Business outcomes


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A world of (downside) surprises

Growth forecasts have been steadily GDP growth, % YOY (Solid bars indicate current forecasts (February 2016);

white bars indicate forecasts as of November 2014)

Developing APAC

SSA MENA US WEUR Developed APAC

CEE LATAM-2%-1%0%1%2%3%4%5%6%7%8%

2015e 2016f


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Currency impacts on earnings are increasing

Translation loss by US and European MNCsUSD millions

Q1 2011

Q2 2011

Q3 2011

Q4 2011

Q1 2012

Q2 2012

Q3 2012

Q4 2012

Q1 2013

Q2 2013

Q3 2013

Q4 2013

Q1 2014

Q2 2014

Q3 2014

Q4 2014

Q1 2015

Q2 2015

Q3 2015

$20 $57 $87$938

$3,004

$20,274

$22,732

$4,186$3,671 $4,099 $4,184

$5,830$7,450

$3,913

$8,000

$20,180

$31,680

$19,490

$24,010


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How quickly has your company adapted to the slowdown in emerging economies?

A. We have adapted quickly to the changing external environment

B. We were slow to make necessary changes, but we have caught up

C. We have largely failed to adapt

D. We have not needed to adapt, as our business has not been very affected

E. Other


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High performance during execution phase requires sustained market monitoring efforts

Unreliable Data

Untested assumptions2

1

Organizational Inertia3

Flawed market monitoring can damage performance

Greatest causes of failed market monitoring

Difficult to make the linkages between changing market conditions and company performance

Plan assumptions based on stable commodity prices, rising Chinese demand, and successful adjustment

Failure to move quickly enough to react to a weaker Brazil, liberalizing Cuba, and a reforming Argentina


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Adaptability is key to success during volatile times

Prime your organization to keep strategic plans on course

Strong planning Strong execution

Growth in revenue,

profitability, market share

Two bridging qualities held by

sustainableperformers

1

High internal alignment

Corporate

Country

Region

Resilience against external surprises

Plan Marketshifts

Regional organizations with high alignment

and resilience are more likely to exceed expectations for

profitability and market share, with a 99% confidence level*

2

Scenario Design Contingency

Planning Ownership


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What kind of indicators in your key markets provide the earliest, most predictive signal for your ability to hit annual targets?

A. Macroeconomic dataB. Industry-level dataC. Channel dataD. Internal dataE. Other


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The data you want isn’t always the most reliable in emerging markets

20% 30% 40% 50% 60% 70% 80% 90%0%

10%

20%

30%

40%

50%

60%

70%

80%Addressable market size

Market share

Competitive intelligence

Macroeconomic data

Customer satisfaction

Customer preferences

Distribution/channel partner financials

Regulatory information

High quality data

Survey of FSG clients on quality and importance of data sources in emerging markets

High

impo

rtan

ce d

ata

Market data considered highly important by MNC regional executives is usually of low quality


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Economic drivers point to slower growth in 2017-18

Strong dollar

Abundant capital flows

Lower energy prices

Slowing emerging markets economic growth


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The Fed will continue to increase interest rates as growth in the US cements

The US Fed will move forward with additional rate hikes as the job market reaches full employment and inflation starts to accelerate

20002002

20042006

20082010

20122014

-4

-2

0

24

6

8

10

12

Real GDP Growth, %YOYFed funds rate, averageUnemployment rate, averageInflation rate

2014 2015 2016 2017 2018 Long Term

0.00.51.01.52.02.53.03.54.0

0.30.5

0.9

1.9

3.03.3

FED funds rate, end-of-year median forecast

Dec '15 FOMC MeetingMar '16 FOMC Meeting


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Energy fundamentals point to low prices

• Slowing global growth• Strong dollar• OPEC politics• Fracking technology• Low interest rates

Political supply disruptions

Supply heavily outweighs demand

2016f 2017f 2018f

FSG oil price projections (Brent) US$ 30-35 US$ 40 US$ 55-60

Sep-

13O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Feb-

14M

ar-1

4Ap

r-14

May

-14

Jun-

14Ju

l-14

Sep-

14O

ct-1

4N

ov-1

4D

ec-1

4Ja

n-15

Feb-

15M

ar-1

5Ap

r-15

May

-15

Jun-

15Ju

l-15

Aug-

15O

ct-1

5N

ov-1

5D

ec-1

5Ja

n-16

20

30

40

50

60

70

80

90

100

110

120Oil prices per barrel

Brent WTI


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Oil prices lead in different directions

International oil prices have dropped dramatically over the last 18 months …

… and this shift has played out differently across APAC

Positive Impact

Mixed Impact

Negative Impact


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Economic drivers will persist

Strong dollar

Abundant capital flows

Lower energy prices

Slowing emerging markets economic growth

Government spending

Monetary policy

normalization


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Include leading indicator analysis into your tracking process

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Leading Indicator Business Performance

3 month leading relationship

1.0% increase in leading indicator

3.0% increase in

sales

When the leading indicator changes course….

…. You can make adjustments to inventory, production, and execution to keep your business ahead of the game

Verify the leading indicators for your business to get a head start on how your business will track against targets and assumptions


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Healthcare leading indicators for China:Market opportunity driven by social safety net

Market potential will continue to improve as China becomes a pivotal market for healthcare companies

Relaxed FDI restrictions

Aging demographics

Health insurance expansion (urban/rural)1

2

3

Healthcare performance drivers

2011 2012 2013 2014e 2015e 2016f 2017f 2018f0

2

4

6

8

10

12

14

16

18

Real healthcare spending, % YOY


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Healthcare leading indicators for Russia:Market conditions driven by forex and oil prices

Healthcare spending will be slow to reverse decline, while companies must manage currency and regulatory pressures

Government pressure to localize production

Currency impacting pricing and partners

Government spending cuts, esp. in regions1

2

3

Healthcare performance drivers

2011 2012 2013 2014e 2015e 2016f 2017f 2018f-8

-6

-4

-2

0

2

4

6

8

10

Real healthcare expenditure, % YOY


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Connect leading indicators analysis to key business drivers

PC HARDWARE SALES, % YOY

KEY LEADING INDICATORS OF PC HARDWARE SALES

LEADING INDICATOR FORECASTS INDUSTRY IMPACT

2013-2015 average 2016f 2017-2020f 2013-2015

average 2016f 2017f H2 2016f H1 2017f

12% 5% 4%

Private consumption, %YOY 3.9% -1% 1.5%

LCU:USD, Real %YOY 2.3% 20% 5%

Industry-level data sets are often available with a long lag, making them significantly less useful for market monitoring purposes

The increased dependence on more high-level indicators in emerging market does put greater focus on ensuring that these indicators are, in fact, leading indicators for performance

Leading indicators must be easier to track, and offer enough lead times for executives to track monthly and quarterly changes


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Case: leading indicators for tractor sales One geography, two product lines

Actuals

Predicted Values95% confidence interval

LARGE TRACTOR MARKET SIZING

We found that 1 year lagged values of loans for agricultural production and the price of wheat together are good predictors of over-100hp tractor production

SMALL TRACTOR MARKET SIZING

We found that 1 year lagged values of corn yield, government expenditure on agriculture, and tractor exports together are good predictors of under-100hp tractor production


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Incorporate leading indicators into your management dashboards

TIME PERIOD

Internal Targets Leading Indicator Analysis

Target Expected Actual Misalignment Leading indicator Expected Actual Misalignment

Revenue growth, % YOY 7.5% 7.1% Somewhat

below targetPersonal disposable

income, % YOY 3.4% -0,2%

Consumer spending has declined significantly as government is pushing

through unexpected austerity measures, including tax

increasesMarket share, % total 12% 13.7% On track

Margin performance, % total 5% 2% Well-below target,

must discuss

Inflation,% YOY 2% 1.8%Official inflation figures have remained low, though input costs have increased with

higher than expected inflation

LCU/USD, % YOY 10% 12.3% FX depreciation has come in higher than projected

Grow sales of new product lines, % of total sales 4% 6% Performing much better

than expectedImport demand by

industry, %YOY 5% 6%Industrial imports, a strong leading indicator for new

product sales performance, is performing above track

Hire new sales members for corporate sales 5 2 Well below target, may need

to revise H2 targetsUnemployment rate,

% of total 5.6% 5.2%Labor market conditions are

somewhat tighter than expected, may need to

increase salary offers by more

Consistent tracking of leading external metrics are essential to effectively monitoring your key markets and ensuring alignment


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Best dashboards highlight changes in leading indicators


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How often does your executive team pull up to evaluate external economic conditions?

A. WeeklyB. MonthlyC. QuarterlyD. Twice a yearE. Annual


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Cadence matters: Best-in-class business reviews test assumptions and track risks

Incorporate periodic assumptions and risk reviews into your traditional business reviews

Q1

Q2

Q3

Q4


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Economic indicators:China linkages cause global ripples

Two of the country’s major growth engines have slowed GDP by expenditure (trillions of RMB in 2000 terms)

2006 2007 2008 2009 2010 2011 2012 2013 2014 2015-20,000

-10,000

0

10,000

20,000

30,000

40,000

50,000

Government spending Consumer spendingGross domestic investment Exports of goods and servicesImports of goods and services

Further trade expansion limited due to slowdown in

international markets

Investment activity cannot sustain long term growth due

to diminishing returns

Domestic consumption will only increase once major

reforms take hold


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The impact of a sharp slowdown in China would vary significantly across Asia’s regions

South Asia: India and the countries surrounding it are shielded

Southeast Asia: ASEAN’s heavy reliance on trade leaves it exposed to a sharp slowdown in China

ANZ: Australia’s heavy dependence on commodity exports to China leaves it exposed

East Asia: S Korea and Japan both depend heavily on Chinese exports, though the former is more exposed because of its greater reliance on exports generally


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Political indicators: How does political risk affect business?

Threat of social unrest

Disruption of social contract

Political change

Regulatory change

Economic change

Security change


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30 35 40 45 50 55 60 65 70 75 80

-3%

-1%

1%

3%

5%

7%

9%

Cape VerdeCameroon

Central African RepublicChad

Comoros

Congo

Congo (DRC)Cote d'Ivoire

Equatorial Guinea

Eritrea

Ethiopia

Gabon

GambiaGhana

GuineaGuinea-Bissau

Kenya

Lesotho

Liberia

Madagascar

MalawiMali

Mauritania

Mozambique

Namibia

Niger

Nigeria

Rwanda

Sao Tome and Principe

Senegal

Seychelles

South AfricaSwaziland

Tanzania

TogoUganda

Zambia

Zimbabwe

Focus on resilient and fast-growing marketsFSG’s resilience to external shock index

Thre

e-ye

ar a

vera

ge G

DP g

row

th 2

016–

2018

Resilience to external shocks

High growth, low resilience

Low growth, low resilience

Low growth, high resilience

High growth, high resilience

Bubble size = 2018 nominal GDP, US$ billions


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Some markets are better prepared to weather the storm – the case of Africa

Factors that favor some markets over others Political stability Quality of governance Economic

diversification Currency volatility Exposure to

commodity prices Export dependency Population size Education

FSG’s Resilience to External Shocks IndexGreen and higher index numbers indicate greater resilience; red and lower

numbers indicate lower resilienceMauritius 83.95 Gabon 58.70Cape Verde 77.21 Togo 58.32Botswana 74.17 Malawi 58.24Nigeria 70.08 Mali 55.49South Africa 69.92 Zambia 54.65Namibia 69.88 Zimbabwe 54.52Senegal 69.82 Madagascar 52.68São Tomé & Príncipe 69.64 Guinea-Bissau 52.08Seychelles 68.86 Liberia 51.58Kenya 68.32 Sierra Leone 51.08Uganda 66.87 Burundi 49.55Ethiopia 64.77 Niger 48.08Tanzania 64.57 Congo (DRC) 47.73Lesotho 64.46 Congo 46.52Eritrea 63.98 Mozambique 46.46Benin 63.57 Burkina Faso 45.39Swaziland 62.53 Equatorial Guinea 43.46Gambia 61.48 Guinea 43.17Côte d’Ivoire 60.92 Angola 41.84Rwanda 59.66 Mauritania 41.51Cameroon 59.07 Chad 40.81Ghana 58.84 Central African Republic 30.66Comoros 58.81


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Scenario analysis makes sense of a risky world

Multitude of risks too vast to track

Upside Scenario

Base Case Scenario

Downside Scenario

A few scenarios/ specific signposts to track

Assess the risks that your business may confront and incorporate them into your planning and monitoring processes


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FSG’s 2016 Events to Watch

Property market collapse

in China

Schengen border

disruption

China rallies

around the flag

Abrupt protectionism

in Russia

Wave of subsidy cuts in MENA

Eurozone austerity backlash

Pegs under

pressure

Corruption crackdown

in Latin America

Cubaachieves

monetary unification

Financial crisis in Turkey

State policy

paralysis in India

Velocity

LikelihoodBubble size represents relative business impact


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How do you use scenarios in planning?

A. We use scenarios during our periodic business reviews

B. We use scenarios to test strategic planning assumptions but not on any cadence

C. We only use scenarios for long-term strategic planning

D. We don’t use scenariosE. Other


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From recognition to action

Establish urgency

Form a powerful guiding

coalition

Create a Vision

Communicate a vision

Empower others

Create an action

plan with quick wins

Consolidate improvements and

institutionalize change

Change Management Steps Establish urgency Form a powerful guiding coalition Create a vision for change Communicate that vision to all necessary

stakeholders Empower and delegate necessary changes Create an action plan that incorporates

quick wins to establish momentum Consolidate improvements and

institutionalize changes into the market monitoring and risk tracking processes

Change doesn’t just happen because you have made a decision and communicated to key stakeholders

Change Management


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L O N D O N25 Southampton BuildingsLondon WC2A 1AL Tel: +44 (0) 203 709 9385

S I N G A P O R E9 Battery Road11/F Straits Trading BuildingSingapore 049910Tel: +65 6422 7920

W A S H I N G T O N D C1150 18th St, NW

Suite 350Washington, DC 20036 USA

Tel: +1 202 741 1333




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Thank you! Now how about a little Q&A?

Email: [email protected]

Web: www.frontierstrategygroup.com

Twitter: @FrontierStrtGrp

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Apply for a free 30-day trial membership at http://IntelCollab.com or learn more about Aurora WDC at http://AuroraWDC.com. See you next time!