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The Intelligence Collaborativehttp://IntelCollab.com #IntelCollab
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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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Questions, Commentary & Content
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How Leading Indicators Keep You Ahead of the Curve in Emerging Markets
Joel Whitaker, Global Head of Research
The Intelligence Collaborativehttp://IntelCollab.com #IntelCollab
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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 Southamptons 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
F S G A R O U N D T H E W O R L Dwww.frontierstrategygroup.com @FrontierStrtGrp
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
F S G A R O U N D T H E W O R L Dwww.frontierstrategygroup.com @FrontierStrtGrp
F S G A R O U N D T H E W O R L Dwww.frontierstrategygroup.com @FrontierStrtGrp
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Thank you! Now how about a little Q&A?
Email: [email protected]
Web: www.frontierstrategygroup.com
Twitter: @FrontierStrtGrp
The Intelligence Collaborative is the online learning and networking community powered by Aurora WDC, our clients, partners and other friends and dedicated to exploring how to apply intelligence methods to solve real-world business problems.
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!