Innovation and commercialisation, 2010: McKinsey Global Survey results

Source: Total Executive

After coping with the global economic crisis, companies are beginning to aim for growth again. But their approach to managing innovation and the challenges they face haven’t changed. The survey results suggest a few ways to improve.

As companies begin to refocus on growth,

 innovation has once again become a priority: in a recent McKinsey Global Survey,¹ 84 percent of executives say innovation is extremely or very important to their companies’ growth strategy. The results also show that the approach companies use to generate good ideas and turn them into products and services has changed little since before the crisis, and not because executives thought what they were doing worked perfectly. Further, many of the challenges—finding the right talent, encouraging collaboration and risk taking, organizing the innovation process from beginning to end—are remarkably consistent. Indeed, surveys over the past few years suggest that the core barriers to successful innovation haven’t changed, and companies have made little progress in surmounting them.

More positively, the results also suggest some ways that companies can become more successful at innovation. In particular, they can formalize processes for setting priorities and commercializing products and integrate innovation into their strategic-planning efforts.

Growth and innovation

Almost all companies are actively seeking growth again. For the largest group of respondents, 41 percent, the focus is on their existing core businesses (Exhibit 1). Only respondents in the high-tech industry differ. In addition, more executives say their companies are seeking organic growth through new products or services or new customers in existing markets (68 percent and 63 percent, respectively) than are pursuing growth through new markets or M&A.

Innovation is important across growth strategies. However, a slightly smaller share of executives at companies seeking growth in their core business, 80 percent, say innovation is very or extremely important, compared with 91 percent of those at companies still in the early stages of expansion.

 

Managing innovation

Just over half of all respondents, 55 percent, say their companies are better than their peers at innovation, a figure that hasn’t budged since 2008. Another consistent pattern is that far fewer respondents say their companies are good at the specific processes and tactics frequently tied to successful innovation—such as generating breakthrough ideas, selecting the right ideas, prototyping, and developing business cases. Respondents say their companies are best at adapting once they’re in the market, with 58 percent claiming to be successful. As in the past, executives have the most difficulty stopping ideas at the right time, with only 26 percent of respondents to this survey saying they do this well.

Fundamentally, the biggest challenge is organization: 42 percent of respondents say improvement in this area alone would make the most profound difference in innovation performance. This figure falls between the shares of respondents to a 2007 survey who selected allocating resources and aligning talent as their companies’ top challenges to successful innovation.² For this year’s respondents, organization is closely followed in importance by developing a climate that fosters innovation; commercializing new businesses, products, or services; and selecting the right ideas and managing a portfolio.

Respondents also indicate that their companies don’t make good use of many specific tactics (Exhibit 2). For example, only 27 percent say their companies are very or extremely effective at making business leaders formally accountable for innovation. Notably, even among respondents at early-growth companies, where innovation is likely to be a particularly high priority, only 34 percent say their business leaders are effectively held accountable.³

Nearly a third of the current survey’s respondents say their companies are effective in setting formal priorities for innovation during the strategic-planning process (Exhibit 3). This result is slightly better than related findings from 2007, when roughly a quarter of respondents said their companies included innovation as a formal part of their strategic-planning process, and from 2008, when just under 20 percent said their innovation processes as a whole were very or extremely formalized.⁴

Respondents at companies that set formal priorities for innovation as part of the planning process are much likelier to say their companies are better at innovation than their peers (63 percent of those who prioritize versus 43 percent of others) and to say their companies are using these tactics effectively. The survey results suggest that simply ensuring innovation is tightly managed can boost performance.

Notes

² In a 2007 survey that focused on innovation management and governance, 34 percent of respondents said one of their leadership team’s greatest challenges was allocating internal resources, and 50 percent said it was aligning and making available top talent for innovation initiatives. See “How companies approach innovation: A McKinsey Global Survey,” mckinseyquarterly.com, October 2007.

³ In a survey earlier this year that focused specifically on research and development, just over a third of respondents said their organizations had improved accountability for R&D performance and spending. Even so, these results suggest accountability isn’t high. See “R&D after the crisis: McKinsey Global Survey results,” mckinseyquarterly.com, April 2010.

⁴ See “How companies approach innovation: A McKinsey Global Survey,” mckinseyquarterly.com, October 2007.

Going to market

Only 39 percent of respondents say their companies are good at commercializing new products or services. This overall assessment seems to have a few different sources (Exhibit 4). Commercialization was a serious concern in 2007 as well; in that year’s survey, nearly a third of senior leaders selected making handoffs from ideas to commercialization as one of their biggest challenges, and 43 percent said the top challenges included choosing which ideas to move forward.

A big part of the problem may be the absence of a formal decision-making process: 40 percent of respondents say their companies make commercialization decisions in an ad hoc manner; only 23 percent say such decisions are a regular agenda topic at corporate-leadership meetings. Thirty-three percent say these decisions are made at the business unit or functional level. Not surprisingly, the aspects of decision making that executives personally find most difficult are the lack of a fact base and the level of uncertainty—the same as in 2007.

The responses indicate that a lack of formal organization is a common problem: more executives chose the absence of a formal process to align the necessary internal resources as the top commercialization challenge, although those at companies with a formal process for commercialization—23 percent of all respondents—say execution is the biggest challenge (Exhibit 5).

Further, whether they say their companies are good or poor at commercialization, respondents highlight two of the same reasons for their performance, and both relate to organization: the relationship between R&D and marketing and the process for translating an idea into a prototype. Those at companies that are poor at commercialization also frequently blame ineffective processes for manufacturing or rolling out innovations. And among all respondents, aligning human and financial resources is the most frequently cited leadership or organizational challenge to successful commercialization (Exhibit 6).

Formality clearly makes a difference: the share of executives saying their companies are good at commercialization rises to 45 percent among those that set formal strategic priorities for innovation, and to 56 percent among the respondents at companies with a very or extremely formalized process for commercializing innovations.

Making organizational changes can be difficult,⁵ however, and most companies have focused on other areas to improve their performance. Forty-four percent of respondents, for example, say their companies have tried partnering more successfully with suppliers and technology firms, with 39 percent having integrated customer insights into the process.

Looking ahead

• Executives at companies that set formal priorities for innovation rate their overall success higher than others and are more likely to say they’re good at a number of tactics tied to success. These results suggest that other companies would benefit from the simple step of setting formal strategic-innovation priorities.
• Organizational factors, including innovation-specific processes and links to support functions, remain a challenge. As hard as it is for companies to implement organizational changes in increasingly complex environments, the results suggest that when companies make the effort, they will experience more success with innovation.
• To improve commercialization, it seems to be crucial to build good relationships among all the functions involved directly (such as R&D) or in support roles (such as IT). Nevertheless, most companies still haven’t tried doing so.
  

About the Authors

The contributors to the development and analysis of this survey include Marla M. Capozzi, a senior expert in McKinsey’s Boston office; Brian Gregg, an associate principal in the San Francisco office; and Amy Howe, a principal in the Los Angeles office.

 

Source:

McKinsey

Posted via email from totalexeconline

Innovation and commercialisation, 2010: McKinsey Global Survey results

Source: Total Executive

After coping with the global economic crisis, companies are beginning to aim for growth again. But their approach to managing innovation and the challenges they face haven’t changed. The survey results suggest a few ways to improve.

As companies begin to refocus on growth,

 innovation has once again become a priority: in a recent McKinsey Global Survey,¹ 84 percent of executives say innovation is extremely or very important to their companies’ growth strategy. The results also show that the approach companies use to generate good ideas and turn them into products and services has changed little since before the crisis, and not because executives thought what they were doing worked perfectly. Further, many of the challenges—finding the right talent, encouraging collaboration and risk taking, organizing the innovation process from beginning to end—are remarkably consistent. Indeed, surveys over the past few years suggest that the core barriers to successful innovation haven’t changed, and companies have made little progress in surmounting them.

More positively, the results also suggest some ways that companies can become more successful at innovation. In particular, they can formalize processes for setting priorities and commercializing products and integrate innovation into their strategic-planning efforts.

Growth and innovation

Almost all companies are actively seeking growth again. For the largest group of respondents, 41 percent, the focus is on their existing core businesses (Exhibit 1). Only respondents in the high-tech industry differ. In addition, more executives say their companies are seeking organic growth through new products or services or new customers in existing markets (68 percent and 63 percent, respectively) than are pursuing growth through new markets or M&A.

Innovation is important across growth strategies. However, a slightly smaller share of executives at companies seeking growth in their core business, 80 percent, say innovation is very or extremely important, compared with 91 percent of those at companies still in the early stages of expansion.

 

Managing innovation

Just over half of all respondents, 55 percent, say their companies are better than their peers at innovation, a figure that hasn’t budged since 2008. Another consistent pattern is that far fewer respondents say their companies are good at the specific processes and tactics frequently tied to successful innovation—such as generating breakthrough ideas, selecting the right ideas, prototyping, and developing business cases. Respondents say their companies are best at adapting once they’re in the market, with 58 percent claiming to be successful. As in the past, executives have the most difficulty stopping ideas at the right time, with only 26 percent of respondents to this survey saying they do this well.

Fundamentally, the biggest challenge is organization: 42 percent of respondents say improvement in this area alone would make the most profound difference in innovation performance. This figure falls between the shares of respondents to a 2007 survey who selected allocating resources and aligning talent as their companies’ top challenges to successful innovation.² For this year’s respondents, organization is closely followed in importance by developing a climate that fosters innovation; commercializing new businesses, products, or services; and selecting the right ideas and managing a portfolio.

Respondents also indicate that their companies don’t make good use of many specific tactics (Exhibit 2). For example, only 27 percent say their companies are very or extremely effective at making business leaders formally accountable for innovation. Notably, even among respondents at early-growth companies, where innovation is likely to be a particularly high priority, only 34 percent say their business leaders are effectively held accountable.³

Nearly a third of the current survey’s respondents say their companies are effective in setting formal priorities for innovation during the strategic-planning process (Exhibit 3). This result is slightly better than related findings from 2007, when roughly a quarter of respondents said their companies included innovation as a formal part of their strategic-planning process, and from 2008, when just under 20 percent said their innovation processes as a whole were very or extremely formalized.⁴

Respondents at companies that set formal priorities for innovation as part of the planning process are much likelier to say their companies are better at innovation than their peers (63 percent of those who prioritize versus 43 percent of others) and to say their companies are using these tactics effectively. The survey results suggest that simply ensuring innovation is tightly managed can boost performance.

Notes

² In a 2007 survey that focused on innovation management and governance, 34 percent of respondents said one of their leadership team’s greatest challenges was allocating internal resources, and 50 percent said it was aligning and making available top talent for innovation initiatives. See “How companies approach innovation: A McKinsey Global Survey,” mckinseyquarterly.com, October 2007.

³ In a survey earlier this year that focused specifically on research and development, just over a third of respondents said their organizations had improved accountability for R&D performance and spending. Even so, these results suggest accountability isn’t high. See “R&D after the crisis: McKinsey Global Survey results,” mckinseyquarterly.com, April 2010.

⁴ See “How companies approach innovation: A McKinsey Global Survey,” mckinseyquarterly.com, October 2007.

Going to market

Only 39 percent of respondents say their companies are good at commercializing new products or services. This overall assessment seems to have a few different sources (Exhibit 4). Commercialization was a serious concern in 2007 as well; in that year’s survey, nearly a third of senior leaders selected making handoffs from ideas to commercialization as one of their biggest challenges, and 43 percent said the top challenges included choosing which ideas to move forward.

A big part of the problem may be the absence of a formal decision-making process: 40 percent of respondents say their companies make commercialization decisions in an ad hoc manner; only 23 percent say such decisions are a regular agenda topic at corporate-leadership meetings. Thirty-three percent say these decisions are made at the business unit or functional level. Not surprisingly, the aspects of decision making that executives personally find most difficult are the lack of a fact base and the level of uncertainty—the same as in 2007.

The responses indicate that a lack of formal organization is a common problem: more executives chose the absence of a formal process to align the necessary internal resources as the top commercialization challenge, although those at companies with a formal process for commercialization—23 percent of all respondents—say execution is the biggest challenge (Exhibit 5).

Further, whether they say their companies are good or poor at commercialization, respondents highlight two of the same reasons for their performance, and both relate to organization: the relationship between R&D and marketing and the process for translating an idea into a prototype. Those at companies that are poor at commercialization also frequently blame ineffective processes for manufacturing or rolling out innovations. And among all respondents, aligning human and financial resources is the most frequently cited leadership or organizational challenge to successful commercialization (Exhibit 6).

Formality clearly makes a difference: the share of executives saying their companies are good at commercialization rises to 45 percent among those that set formal strategic priorities for innovation, and to 56 percent among the respondents at companies with a very or extremely formalized process for commercializing innovations.

Making organizational changes can be difficult,⁵ however, and most companies have focused on other areas to improve their performance. Forty-four percent of respondents, for example, say their companies have tried partnering more successfully with suppliers and technology firms, with 39 percent having integrated customer insights into the process.

Looking ahead

• Executives at companies that set formal priorities for innovation rate their overall success higher than others and are more likely to say they’re good at a number of tactics tied to success. These results suggest that other companies would benefit from the simple step of setting formal strategic-innovation priorities.
• Organizational factors, including innovation-specific processes and links to support functions, remain a challenge. As hard as it is for companies to implement organizational changes in increasingly complex environments, the results suggest that when companies make the effort, they will experience more success with innovation.
• To improve commercialization, it seems to be crucial to build good relationships among all the functions involved directly (such as R&D) or in support roles (such as IT). Nevertheless, most companies still haven’t tried doing so.
  

About the Authors

The contributors to the development and analysis of this survey include Marla M. Capozzi, a senior expert in McKinsey’s Boston office; Brian Gregg, an associate principal in the San Francisco office; and Amy Howe, a principal in the Los Angeles office.

 

Source:

McKinsey

Posted via email from Total Executive

Innovation and commercialisation, 2010: McKinsey Global Survey results

Source: Total Executive

After coping with the global economic crisis, companies are beginning to aim for growth again. But their approach to managing innovation and the challenges they face haven’t changed. The survey results suggest a few ways to improve.

As companies begin to refocus on growth,

 innovation has once again become a priority: in a recent McKinsey Global Survey,¹ 84 percent of executives say innovation is extremely or very important to their companies’ growth strategy. The results also show that the approach companies use to generate good ideas and turn them into products and services has changed little since before the crisis, and not because executives thought what they were doing worked perfectly. Further, many of the challenges—finding the right talent, encouraging collaboration and risk taking, organizing the innovation process from beginning to end—are remarkably consistent. Indeed, surveys over the past few years suggest that the core barriers to successful innovation haven’t changed, and companies have made little progress in surmounting them.

More positively, the results also suggest some ways that companies can become more successful at innovation. In particular, they can formalize processes for setting priorities and commercializing products and integrate innovation into their strategic-planning efforts.

Growth and innovation

Almost all companies are actively seeking growth again. For the largest group of respondents, 41 percent, the focus is on their existing core businesses (Exhibit 1). Only respondents in the high-tech industry differ. In addition, more executives say their companies are seeking organic growth through new products or services or new customers in existing markets (68 percent and 63 percent, respectively) than are pursuing growth through new markets or M&A.

Innovation is important across growth strategies. However, a slightly smaller share of executives at companies seeking growth in their core business, 80 percent, say innovation is very or extremely important, compared with 91 percent of those at companies still in the early stages of expansion.

 

Managing innovation

Just over half of all respondents, 55 percent, say their companies are better than their peers at innovation, a figure that hasn’t budged since 2008. Another consistent pattern is that far fewer respondents say their companies are good at the specific processes and tactics frequently tied to successful innovation—such as generating breakthrough ideas, selecting the right ideas, prototyping, and developing business cases. Respondents say their companies are best at adapting once they’re in the market, with 58 percent claiming to be successful. As in the past, executives have the most difficulty stopping ideas at the right time, with only 26 percent of respondents to this survey saying they do this well.

Fundamentally, the biggest challenge is organization: 42 percent of respondents say improvement in this area alone would make the most profound difference in innovation performance. This figure falls between the shares of respondents to a 2007 survey who selected allocating resources and aligning talent as their companies’ top challenges to successful innovation.² For this year’s respondents, organization is closely followed in importance by developing a climate that fosters innovation; commercializing new businesses, products, or services; and selecting the right ideas and managing a portfolio.

Respondents also indicate that their companies don’t make good use of many specific tactics (Exhibit 2). For example, only 27 percent say their companies are very or extremely effective at making business leaders formally accountable for innovation. Notably, even among respondents at early-growth companies, where innovation is likely to be a particularly high priority, only 34 percent say their business leaders are effectively held accountable.³

Nearly a third of the current survey’s respondents say their companies are effective in setting formal priorities for innovation during the strategic-planning process (Exhibit 3). This result is slightly better than related findings from 2007, when roughly a quarter of respondents said their companies included innovation as a formal part of their strategic-planning process, and from 2008, when just under 20 percent said their innovation processes as a whole were very or extremely formalized.⁴

Respondents at companies that set formal priorities for innovation as part of the planning process are much likelier to say their companies are better at innovation than their peers (63 percent of those who prioritize versus 43 percent of others) and to say their companies are using these tactics effectively. The survey results suggest that simply ensuring innovation is tightly managed can boost performance.

Notes

² In a 2007 survey that focused on innovation management and governance, 34 percent of respondents said one of their leadership team’s greatest challenges was allocating internal resources, and 50 percent said it was aligning and making available top talent for innovation initiatives. See “How companies approach innovation: A McKinsey Global Survey,” mckinseyquarterly.com, October 2007.

³ In a survey earlier this year that focused specifically on research and development, just over a third of respondents said their organizations had improved accountability for R&D performance and spending. Even so, these results suggest accountability isn’t high. See “R&D after the crisis: McKinsey Global Survey results,” mckinseyquarterly.com, April 2010.

⁴ See “How companies approach innovation: A McKinsey Global Survey,” mckinseyquarterly.com, October 2007.

Going to market

Only 39 percent of respondents say their companies are good at commercializing new products or services. This overall assessment seems to have a few different sources (Exhibit 4). Commercialization was a serious concern in 2007 as well; in that year’s survey, nearly a third of senior leaders selected making handoffs from ideas to commercialization as one of their biggest challenges, and 43 percent said the top challenges included choosing which ideas to move forward.

A big part of the problem may be the absence of a formal decision-making process: 40 percent of respondents say their companies make commercialization decisions in an ad hoc manner; only 23 percent say such decisions are a regular agenda topic at corporate-leadership meetings. Thirty-three percent say these decisions are made at the business unit or functional level. Not surprisingly, the aspects of decision making that executives personally find most difficult are the lack of a fact base and the level of uncertainty—the same as in 2007.

The responses indicate that a lack of formal organization is a common problem: more executives chose the absence of a formal process to align the necessary internal resources as the top commercialization challenge, although those at companies with a formal process for commercialization—23 percent of all respondents—say execution is the biggest challenge (Exhibit 5).

Further, whether they say their companies are good or poor at commercialization, respondents highlight two of the same reasons for their performance, and both relate to organization: the relationship between R&D and marketing and the process for translating an idea into a prototype. Those at companies that are poor at commercialization also frequently blame ineffective processes for manufacturing or rolling out innovations. And among all respondents, aligning human and financial resources is the most frequently cited leadership or organizational challenge to successful commercialization (Exhibit 6).

Formality clearly makes a difference: the share of executives saying their companies are good at commercialization rises to 45 percent among those that set formal strategic priorities for innovation, and to 56 percent among the respondents at companies with a very or extremely formalized process for commercializing innovations.

Making organizational changes can be difficult,⁵ however, and most companies have focused on other areas to improve their performance. Forty-four percent of respondents, for example, say their companies have tried partnering more successfully with suppliers and technology firms, with 39 percent having integrated customer insights into the process.

Looking ahead

• Executives at companies that set formal priorities for innovation rate their overall success higher than others and are more likely to say they’re good at a number of tactics tied to success. These results suggest that other companies would benefit from the simple step of setting formal strategic-innovation priorities.
• Organizational factors, including innovation-specific processes and links to support functions, remain a challenge. As hard as it is for companies to implement organizational changes in increasingly complex environments, the results suggest that when companies make the effort, they will experience more success with innovation.
• To improve commercialization, it seems to be crucial to build good relationships among all the functions involved directly (such as R&D) or in support roles (such as IT). Nevertheless, most companies still haven’t tried doing so.
  

About the Authors

The contributors to the development and analysis of this survey include Marla M. Capozzi, a senior expert in McKinsey’s Boston office; Brian Gregg, an associate principal in the San Francisco office; and Amy Howe, a principal in the Los Angeles office.

 

Source:

McKinsey

Posted via email from Swap A Book For Students

Growing up fast: Vietnam discovers the consumer society

Source: Total Executive

Retailers cannot afford to skip Asia’s youngest market. Here’s why.

Vietnam began to liberalize its economy

 in the 1980s, when the country’s leaders launched doi moi (or “renovation”). It was only after President Clinton lifted the US trade embargo in 1994, though, that multinationals began to pile in. Since then, Vietnam has taken off. In 2007, it joined the World Trade Organization (WTO)—just in time for the global financial crisis. The country weathered the storm well, posting 5 percent growth in 2009. This year should be even better.

For retailers and consumer goods companies, Vietnam is an attractive market: the economy is growing briskly and sustainably, and the population is adding a million people a year. Even more important, the county’s middle class, now 7 million households, is growing fast. Vietnam’s literacy rate is 92.5 percent, and from 2003 to 2008 the number of college and university students nearly doubled. The cities, though mostly small, are expanding rapidly. Six of them—Can Tho, Da Nang, Haiphong, Hanoi, Ho Chi Minh City, and Nha Trang—account for 40 percent of the country’s sales, according to AC Nielsen estimates from 2007 (Exhibit 1).

The Vietnamese government estimates that retail sales reached $39.1 billion in 2009—almost twice as high as five years earlier. And the country has room to grow: per capita retail sales, at $450, are among the lowest in Asia. Setting up shop in Vietnam, however, isn’t easy. The market is fragmented and difficult to reach, and although 100 percent foreign-owned retailers can register for an operating license, they are generally allowed to open only one outlet. To expand further, they must pass an “economic needs test,” in which the government analyzes a new project’s economic impact. The test gives local governments an effective—and sometimes arbitrary—veto over new developments. Such regulations are legal and relatively common under WTO guidelines. Even so, they are more broadly applied in Vietnam than in most other countries, limiting access to the domestic market.

McKinsey has worked in Vietnam with a number of domestic and international companies. In June 2010, we spoke with a dozen executives who do business there. We offer the following observations, based on these interviews and our own experiences, about what it takes to succeed in this dynamic market.

Know your consumers

Vietnamese consumers want the same things others do—good, reliable products that enhance their daily lives (Exhibit 2). What makes Vietnam distinctive, though, is how quickly consumers are moving up the ladder—“leapfrogging,” in the words of Unilever Vietnam’s chairman, Marijn van Tiggelen. In personal care, for example, increasing numbers of people are buying more sophisticated products. Urban Vietnamese women aged 20 to 45, for example, spend 18 percent of their monthly income on apparel, according to the General Statistics Office of Vietnam. The Vietnam Ministry of Industry and Trade forecasts that the market for beauty products will grow 15 percent a year for the foreseeable future. Jean-Yves Romagnani, the chief operating officer of TamSon, a leading luxury-goods distributor in Vietnam, with brands such as Hermès and Kenzo, told us that the market for these products, though small, is growing dramatically. (To hear more from executives discussing Vietnam’s quickly growing consumer market, see the video “Understanding the new Vietnam” or download a PDF of the transcript).

Market the message

In 2009, the General Statistics Office estimated that Vietnam had 5 million Internet subscribers and 18 million Internet users. Those figures are impressive for a country at a relatively early stage of digital development, and other estimates suggest the number is even higher. In Hanoi and Ho Chi Minh City, for instance, up to half of the population is now online, spending more than two hours a day, on average. Expenditures on digital marketing for the country as a whole, however, are still very low: only $15 million, according to Cimigo, a market research firm. As Mai Huong Hoang, the chairwoman of one of Vietnam’s leading advertising agencies, the local branch of Saatchi & Saatchi, noted, “TV is still king in Vietnam, because women are the decision makers in the family and they spend a lot of time watching TV.” However, recent McKinsey research in other emerging markets, such as China, India, and Malaysia, suggests that the pace of digital change can be rapid, especially with younger people. Therefore, businesses—particularly consumer goods companies—shouldn’t ignore digital media in their marketing plans.

Regardless of which media channels companies select, they should know that almost all Vietnamese consumers are literate—and also highly literal. Go into a grocery store and you will probably see shoppers reading the product labels. To build brands, companies had better live up to the claims they make about their products—and the more concrete the claims, the better.

See problems as possibilities

Metro Cash & Carry is a global company that sells food and other consumer goods to stores and wholesalers. Each of its nine stores in Vietnam offers tens of thousands of items, nearly all locally produced, and employs some 250 people. The company’s experience in the country shows how to build a successful business while supporting local suppliers and performing an important social function.

Food safety in Vietnam is a significant issue, with an estimated 3 million cases of food poisoning a year. People have good reason to worry about poor food hygiene and refrigeration among street vendors and wet markets. Earlier this year, the government’s food safety agency announced that 2,000 teams had inspected 47,000 businesses and found 13,000 violations during the Tet holiday alone.

Metro has made food safety a core part of its mission. The company’s focus on supply chain management and quality assurance also benefits local producers. Since 2002, Metro has trained almost 19,000 Vietnamese farmers and fisherman in food safety methods as part of its “farm to fork” quality-management system. Producers who meet these standards not only have a reliable buyer in Metro but also get access to foreign markets. Metro has done very well in Vietnam and plans to increase its operations there substantially.

Think creatively about distribution

Running about 1,000 miles from north to south, Vietnam is predominantly rural, and its infrastructure presents challenges. Only three cities (Haiphong, Hanoi, and Ho Chi Minh City) have more than one million people. Modern trade—larger self-service stores, typically belonging to chains, as opposed to wet markets or “mom and pop” shops—is growing, with more than 400 locations. Even so, this segment accounts for only about 10 percent of total retail sales (but closer to 80 to 90 percent in Ho Chi Minh City). Companies that wait for modern trade to mature could miss a chance to win consumer loyalty and market share. So how can retailers reach consumers in this dispersed and fragmented market?

Unilever has developed a network of independent and exclusive distributors that sell and distribute its goods in every nook and cranny of the country’s 63 cities and provinces. “If you want to be a successful consumer goods player in Vietnam, study Unilever,” advises Anh Tu Do, CEO of Diana, one of Vietnam’s leading consumer products companies. “We studied the way Unilever gets its products to market throughout the country, and in our company we use exactly the same model as they do.” Much of Unilever’s success comes from the degree to which it trains and monitors its distributors, giving them responsibility for managing their own operations. Of course, Unilever’s system won’t work for all businesses; the point is to approach Vietnam on its own terms.

Vietnam is one of the world’s fastest-growing economies, and there’s no reason to believe it will slow down. Its infrastructure is improving, and modern trade has made significant inroads. Asia’s youngest population and the rapid adoption of modern technology make Vietnam an exciting market. But it is by no means an easy one.

About the Authors

Marco Breu is a principal in McKinsey’s Bangkok office, Brian Salsberg is a principal in the Tokyo office, and Hà Thanh Tú is a consultant in the Singapore office.

Posted via email from Swap A Book For Students

Growing up fast: Vietnam discovers the consumer society

Source: Total Executive

Retailers cannot afford to skip Asia’s youngest market. Here’s why.

Vietnam began to liberalize its economy

 in the 1980s, when the country’s leaders launched doi moi (or “renovation”). It was only after President Clinton lifted the US trade embargo in 1994, though, that multinationals began to pile in. Since then, Vietnam has taken off. In 2007, it joined the World Trade Organization (WTO)—just in time for the global financial crisis. The country weathered the storm well, posting 5 percent growth in 2009. This year should be even better.

For retailers and consumer goods companies, Vietnam is an attractive market: the economy is growing briskly and sustainably, and the population is adding a million people a year. Even more important, the county’s middle class, now 7 million households, is growing fast. Vietnam’s literacy rate is 92.5 percent, and from 2003 to 2008 the number of college and university students nearly doubled. The cities, though mostly small, are expanding rapidly. Six of them—Can Tho, Da Nang, Haiphong, Hanoi, Ho Chi Minh City, and Nha Trang—account for 40 percent of the country’s sales, according to AC Nielsen estimates from 2007 (Exhibit 1).

The Vietnamese government estimates that retail sales reached $39.1 billion in 2009—almost twice as high as five years earlier. And the country has room to grow: per capita retail sales, at $450, are among the lowest in Asia. Setting up shop in Vietnam, however, isn’t easy. The market is fragmented and difficult to reach, and although 100 percent foreign-owned retailers can register for an operating license, they are generally allowed to open only one outlet. To expand further, they must pass an “economic needs test,” in which the government analyzes a new project’s economic impact. The test gives local governments an effective—and sometimes arbitrary—veto over new developments. Such regulations are legal and relatively common under WTO guidelines. Even so, they are more broadly applied in Vietnam than in most other countries, limiting access to the domestic market.

McKinsey has worked in Vietnam with a number of domestic and international companies. In June 2010, we spoke with a dozen executives who do business there. We offer the following observations, based on these interviews and our own experiences, about what it takes to succeed in this dynamic market.

Know your consumers

Vietnamese consumers want the same things others do—good, reliable products that enhance their daily lives (Exhibit 2). What makes Vietnam distinctive, though, is how quickly consumers are moving up the ladder—“leapfrogging,” in the words of Unilever Vietnam’s chairman, Marijn van Tiggelen. In personal care, for example, increasing numbers of people are buying more sophisticated products. Urban Vietnamese women aged 20 to 45, for example, spend 18 percent of their monthly income on apparel, according to the General Statistics Office of Vietnam. The Vietnam Ministry of Industry and Trade forecasts that the market for beauty products will grow 15 percent a year for the foreseeable future. Jean-Yves Romagnani, the chief operating officer of TamSon, a leading luxury-goods distributor in Vietnam, with brands such as Hermès and Kenzo, told us that the market for these products, though small, is growing dramatically. (To hear more from executives discussing Vietnam’s quickly growing consumer market, see the video “Understanding the new Vietnam” or download a PDF of the transcript).

Market the message

In 2009, the General Statistics Office estimated that Vietnam had 5 million Internet subscribers and 18 million Internet users. Those figures are impressive for a country at a relatively early stage of digital development, and other estimates suggest the number is even higher. In Hanoi and Ho Chi Minh City, for instance, up to half of the population is now online, spending more than two hours a day, on average. Expenditures on digital marketing for the country as a whole, however, are still very low: only $15 million, according to Cimigo, a market research firm. As Mai Huong Hoang, the chairwoman of one of Vietnam’s leading advertising agencies, the local branch of Saatchi & Saatchi, noted, “TV is still king in Vietnam, because women are the decision makers in the family and they spend a lot of time watching TV.” However, recent McKinsey research in other emerging markets, such as China, India, and Malaysia, suggests that the pace of digital change can be rapid, especially with younger people. Therefore, businesses—particularly consumer goods companies—shouldn’t ignore digital media in their marketing plans.

Regardless of which media channels companies select, they should know that almost all Vietnamese consumers are literate—and also highly literal. Go into a grocery store and you will probably see shoppers reading the product labels. To build brands, companies had better live up to the claims they make about their products—and the more concrete the claims, the better.

See problems as possibilities

Metro Cash & Carry is a global company that sells food and other consumer goods to stores and wholesalers. Each of its nine stores in Vietnam offers tens of thousands of items, nearly all locally produced, and employs some 250 people. The company’s experience in the country shows how to build a successful business while supporting local suppliers and performing an important social function.

Food safety in Vietnam is a significant issue, with an estimated 3 million cases of food poisoning a year. People have good reason to worry about poor food hygiene and refrigeration among street vendors and wet markets. Earlier this year, the government’s food safety agency announced that 2,000 teams had inspected 47,000 businesses and found 13,000 violations during the Tet holiday alone.

Metro has made food safety a core part of its mission. The company’s focus on supply chain management and quality assurance also benefits local producers. Since 2002, Metro has trained almost 19,000 Vietnamese farmers and fisherman in food safety methods as part of its “farm to fork” quality-management system. Producers who meet these standards not only have a reliable buyer in Metro but also get access to foreign markets. Metro has done very well in Vietnam and plans to increase its operations there substantially.

Think creatively about distribution

Running about 1,000 miles from north to south, Vietnam is predominantly rural, and its infrastructure presents challenges. Only three cities (Haiphong, Hanoi, and Ho Chi Minh City) have more than one million people. Modern trade—larger self-service stores, typically belonging to chains, as opposed to wet markets or “mom and pop” shops—is growing, with more than 400 locations. Even so, this segment accounts for only about 10 percent of total retail sales (but closer to 80 to 90 percent in Ho Chi Minh City). Companies that wait for modern trade to mature could miss a chance to win consumer loyalty and market share. So how can retailers reach consumers in this dispersed and fragmented market?

Unilever has developed a network of independent and exclusive distributors that sell and distribute its goods in every nook and cranny of the country’s 63 cities and provinces. “If you want to be a successful consumer goods player in Vietnam, study Unilever,” advises Anh Tu Do, CEO of Diana, one of Vietnam’s leading consumer products companies. “We studied the way Unilever gets its products to market throughout the country, and in our company we use exactly the same model as they do.” Much of Unilever’s success comes from the degree to which it trains and monitors its distributors, giving them responsibility for managing their own operations. Of course, Unilever’s system won’t work for all businesses; the point is to approach Vietnam on its own terms.

Vietnam is one of the world’s fastest-growing economies, and there’s no reason to believe it will slow down. Its infrastructure is improving, and modern trade has made significant inroads. Asia’s youngest population and the rapid adoption of modern technology make Vietnam an exciting market. But it is by no means an easy one.

About the Authors

Marco Breu is a principal in McKinsey’s Bangkok office, Brian Salsberg is a principal in the Tokyo office, and Hà Thanh Tú is a consultant in the Singapore office.

Posted via email from Total Executive