The CFO perspective — at a glance

For a copy of the full report, please visit ey.com/consumerproducts.

Further reading

• Disrupt or be disrupted: creating value in the consumer products brand new order, EY, 2012.

• Driving profitable growth: the productivity challenge in China, EY, 2013.

• What lies beneath? The hidden costs of entering rapid-growth markets, EY, 2013.

• A tale of two markets: telling the story of investment across developed and rapid-growth markets, EY, 2013.

Other insights for the CFO

Profit or lose is one of a number of studies that provide insight relating to the CFO role — represented by the wheel below. For more on these insights, please go to ey.com/cfo or contact your local EY representative.

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Providing insight

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Funding organizational strategy

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Leading key initiatives in finance that support overall strategic goals

Ensuring businessdecisions are grounded in sound financial criteria

Representing the organization’s progress on strategic goals to external stakeholders

Providing insight and analysis to support the CEO and other senior managers

Developing and defining the overall strategy for your organization

Funding, enablingand executingstrategy set by the CEO

The CFO’srole

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CFOs must shift the focus on performance in Asia’s emerging markets from growth to profitability. As well as being the engines of global growth, emerging Asia must also become a key source of profitability. CFOs must no longer be satisfied that business in these regions is growing in revenue terms — they must also be setting targets to increase profitability and monitor progress toward this goal carefully. This means putting in place the right KPIs and monitoring them continuously.

Rising internal and external costs can be a powerful barrier to profitability. In Asia’s emerging markets, external costs, including labor costs, commodity prices and the high costs of capital, are squeezing the profitability of investments. At the same time, internal costs, including too many fixed costs in the business, add to the pressure. CFOs must work carefully with their business partners to strip out costs that do not add value, and monitor carefully the execution of steps that are required to deliver profitable growth.

When allocating resources, CFOs must be careful to balance short-term growth and long-term profits. Investments in new markets in emerging Asia may be unprofitable at the outset, but companies should be careful to move quickly to a “pay-as- you-go” system, where it is possible to invest sustainably at the speed with which margin is generated. Growth for the sake of growing causes problems, because it cannot be replicated everywhere due to limited resources.

Diversification across markets helps to manage risk and drive scale. Across emerging Asia, countries, regions and cities are all growing at different rates and are at different stages of development. Diversification across segments, categories and products is essential to match the inherent diversity of the region, drive economies of scale and scope to reduce complexity and drive profitable growth. Companies also need to be flexible about their entry strategies and adapt them to suit different markets. This may include joint ventures where necessary.

Give local autonomy, but watch out for unwanted costs. Local managers need to be empowered to make decisions on the ground, but a strong governance framework is required to embed accountability. Local autonomy can also impose unwanted costs if not handled correctly by leading to duplication

Implications for CFOs Profit or loseBalancing the growth-profit paradox for global consumer products companies and retailers in Asia’s emerging markets

of effort because the same basic activities are replicated in multiple markets. This highlights the importance of putting in place clear roles and responsibilities, and thinking about where standardized and centralized resources can be provided to support local execution.

Make sure the right data is available to support investment decision-making. A granular understanding of current and future profit pools requires up-to-date information about this dynamic, fast-moving market. Companies need to combine internal and external data and have robust tools in place to analyze that data and extract insight. Once the right data has been collected, CFOs and their teams then need to be able to separate signal from noise and apply analytical insight to guide decision-making.

The CFO perspective — at a glanceWe want to help you get to the insight you need as quickly as possible. EY’s CFO perspectives summarize the key findings from EY reports from the perspective of the CFO and future finance leader.

Almost every major consumer products and retail company has already taken steps to capture the huge growth opportunity presented by Asia’s emerging markets but, for most, profitability has been a secondary consideration. Making growth profitable in emerging Asia is far from straightforward, especially as volatility increases. It requires companies to walk a tightrope between a series of apparent contradictions: they must be flexible but also efficient, embed local autonomy but benefit from global scale, and seek out both short-term gains and long-term opportunities. Resolving these contradictions will be essential if companies are to profit, rather than lose, in emerging markets.

To achieve profitable, long-term growth in Asia’s emerging markets, we believe consumer products companies and retailers need to address each of the following eight business imperatives:

1. Empower local leadership to be agile, but ensure they are accountable. The volatility and diversity of Asia’s emerging markets demands an increasing level of autonomy at the local level. Our research found that high-performing companies tend to give local managers greater decision rights across all aspects of the business. Companies must be careful, however, to ensure that decisions taken locally are consistent with the overall framework for the company’s strategic vision.

2. Disrupt traditional approaches for local relevance. Profitable localization requires multinationals to shake off traditional mature-market mindsets and operating models. Companies should disrupt their own offerings and operating models and rebuild themselves around what is needed to be locally relevant.

3. Be granular in understanding current and future profit pools. Sustaining profitable growth requires a shift of emphasis from a homogenous market share and growth mentality to understanding the real drivers of both growth and profitability at a detailed local level. To this end, leading companies are using technology to build supply chain visibility and are investing in data analytics capabilities.

4. Create scale by placing bets across categories, price tiers and channels. The high level of competition and consumer variance across Asia’s emerging markets means that companies should create scale by adopting a portfolio approach across multiple market niches and flanking particular segments. This should include balancing investments between those that are already profitable, those that will quickly reach profitability and those that are longer-term bets.

5. Balance efficiency with consumer immediacy. Although a focus on efficiency has long been an important driver of profitability, companies should not prioritize this over providing value for consumers. Companies should design supply chains that have the flexibility to both customize products and adapt quickly.

6. Cluster for synergies based on common characteristics, not just geography. Companies should transcend geographical lines and instead cluster opportunities based on their significance or common characteristics, leveraging best practices across the cluster.

7. Flex the approach as the market develops. The fast pace of change means that companies should build the capability to flex their approach as the local market develops, such as by moving from a reliance on third-party distribution partners to building the capability in-house.

8. Create a culture that mandates disciplined execution. The ability to execute in Asia is now critical to the long-term health of the overall corporation. Companies should therefore focus on creating a culture that prioritizes execution and places it within a robust framework of repeatable processes and governance models.

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This material has been prepared for general informational purposes only and is not intended to be relied upon as accounting, tax or other professional advice. Please refer to your advisors for specific advice.

What is Profit or lose about?Profit or lose explores how consumer products are managing in emerging Asia. In 2013, we commissioned a survey of more than 250 senior Asia-based executives at multinational firms across the consumer products and retail sectors. We also spoke to CEOs, CFOs and other top executives from many of the world’s leading consumer products companies with operations in emerging Asia. In this CFO perspective, we explain how CFOs can help ensure their companies’ sustainable growth prospects in Asia’s emerging markets by shifting the focus from growth to profitable growth.

In a sentence As Asia’s emerging markets become more volatile, consumer products CFOs need to help their companies shift their focus from growth to profitable growth to capture the potential rewards sustainably.