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While executives reported few problems with the technical and mathematical skills of the work force in emerging markets, they have encountered difficulties finding workers with a broader range of sophisticated job skills that are important for higher-level positions. For example, almost half the executives were not satisfied with the leadership skills overall among the Chinese labor force, while 42 percent had the same experience in Southeast Asia, and roughly one-third in the other markets (Exhibit 7). Roughly one-third of executives said they were less than satisfied with the problem-solving skills available in the work force in each of the five emerging markets, with the single exception of India. Finding qualified English-speaking workers for senior managerial positions is another challenge. Many global companies use English as their common language, even if they are not headquartered in an English-speaking country. More than half of the executives were not satisfied with the English-language skills of the labor force in Latin America, and one-third or more of executives saw this as a problem in the other markets, except for India.

Customizing Talent Strategies

To compete effectively for skilled talent in this more difficult environment, manufacturers are finding they have to go beyond a narrow focus on compensation. Instead, they must offer a well-designed value proposition to employees that leverage a broad range of human resources strategies and tools. This integrated value proposition should include compensation, incentives, benefits, developmental opportunities, career paths, working conditions, company culture, and more.

And while global manufacturers may bring the advantages of consistent, company-wide policies in some cases, they also need to customize their talent management approach to the realities in individual emerging markets. The experience of a major U.S manufacturer of construction and mining equipment provides an example. The company has traditionally hired workers within five years after graduation and planned to have them stay with the company for their entire careers. The company is growing so quickly in China, however, they decided their traditional approach would inhibit their growth. Instead, they decided to build management talent more quickly by also hiring older workers who already have 15 or more years of experience. The fact that most production workers in Mexico rely on public transportation or bicycles had to be incorporated into their planning by Hill-Rom, a $1.2-billion subsidiary of Hillenbrand Industries that manufactures hospital beds and other healthcare products. In choosing a location, they found that a factory could only expect to draw workers from a distance of five or 10 miles. They also adjusted factory operations; while their shifts normally begin at 7AM, they have moved shifts earlier or later in Mexico to accommodate bus schedules.

Manufacturers often find they have to provide special benefits they wouldn't provide in developed markets, such as medical benefits for parents of workers in India, or allowances in China for such items as transportation, clothing, and housing. AstenJohnson, a $260-million manufacturer of paper machine clothing, specialty fabrics, filaments and drainage equipment, has also found that the timing of compensation can be important. In its Chinese facility, the company provides three salary reviews each year rather than one, and also spreads out bonuses, to discourage talented employees from leaving. These are just a few examples of the myriad ways in which companies find they need to adjust their human resource practices, both in design and presentation, to accommodate the needs of individual emerging markets. They also underscore the need for intimate knowledge of the local labor market and culture. Several of the executives interviewed stressed the importance of hiring a skilled local executive to manage personnel and talent issues.

It is not surprising that offering appropriate compensation is essential, but executives stressed the importance of other strategies as well. Sixty-three percent of the executives said training was an important HR strategy for their company in emerging markets, the same percentage as for compensation (Exhibit 8). In fact, 78 percent of executives said training was an important strategy for them in India, the highest-rated HR strategy for the country. Similarly, in China, more than two-thirds rated training as an important strategy, again more than for any other HR strategy. Roughly two-thirds or more of executives cited training as an important strategy for their companies in Southeast Asia, Latin America, and Eastern Europe as well.

In their efforts to attract and retain highly qualified employees, career opportunities and non- monetary rewards and recognition also figured prominently-59 percent of executives said providing career opportunities was an important strategy for their companies in emerging markets, while roughly half said the same about offering rewards and recognition. In Southeast Asia, providing rewards and recognition was the highest-rated HR strategy, cited as important by 72 percent of the executives.

Executives that reported these tools were important to their companies' talent strategies were in fact more likely to also report they had been successful in achieving their operational goals. Not surprisingly, companies that used compensation as an important strategy to attract and retain qualified workers proved more successful. Sixty-six percent of executives who said that they relied on compensation in an emerging market rated their company as being extremely or very successful in achieving their operational goals in that market, compared 52 percent where compensation was not an important strategy (Exhibit 9).

But a broader set of strategies also provided real value, and perhaps served to differentiate companies that use them. For emerging market operations where training was an important strategy, 65 percent of executives of the executives said they had been extremely or very successful in achieving their operational goals, compared to 57 percent where training was not considered an especially important strategy.

There was an even bigger performance gap for rewards and recognition, a strategy that is often overlooked. Seventy-three percent of executives at companies where rewards and recognition is an important HR strategy in emerging markets said they had been extremely or very successful in achieving their operational goals, compared to 51 percent of executives at companies where this was not considered an important strategy. Companies have an opportunity to improve performance by going beyond compensation and benefits to carefully craft programs that leverage the power of non-monetary rewards and recognition to motivate employees.

The survey found only a modest difference between the operational success of companies that emphasized training and those that did not, and none for companies that emphasized career opportunities compared to those that did not. Yet, this may be due more to the skill at implementation than the potential of these strategies. A pay raise is easy to implement, and there is no difference between the same level of pay provided by different manufacturers. But training and career opportunities are another matter. Savvy employees know the career opportunities are brighter at a global manufacturing company with a well known brand name, or at a dynamic mid-size company. Similarly, training not only differs in its intrinsic quality, there may also be a perception that being trained at a strong global company is more valuable.

In fact, all the manufacturing executives interviewed in depth stressed the importance of training and providing career opportunities to their strategies to attract, and even more importantly, to retain qualified employees. In addition to ongoing training, Johnson & Johnson, the $53-billion healthcare products manufacturer, offers its employees opportunities to work at multiple operating units in the company to give them a breadth of experience. They also send talented employees to work for a period in its U.S. and European operations, which gives them a broader understanding of the company and a wider set of skills and professional experiences.

Siemens has a talent identification program that aims to identify top talent early in their careers with the company, continually develop their skills, and retain them by demonstrating they have a bright future with the company. For each employee in the program, a development plan and career path are developed, opportunities are provided to work in other parts of the company, and they are invited to top management meetings. The company also maintains a regional talent database, so that a top performer in one emerging market may be identified as the right person for an opening in another country in the region or at headquarters. Although this program is global, it has proven especially helpful in retaining talented employees in emerging markets.

Executives say that offering rewards and recognition has also proved effective. One element of AstenJohnson's talent strategy at its production facility in the Suzhou Industrial Park in China is to reward employees by providing small promotions and new titles. It also works hard to create a strong team ethic, sending its entire work force of 75 employees on a leisure trip each year.

Taking a Comprehensive View: Risk Management

Along with the potential commercial rewards offered by emerging markets come numerous risks that need to be managed effectively, from intellectual property to geopolitical risks. Yet, too many companies employ processes that fail to achieve the comprehensive view of risk that can help them identify and manage developments that could prevent them from achieving their goals.

Too often, companies take a piecemeal approach to risk management in emerging markets-failing to consider the full range of risks they face, conducting less rigorous risk assessments for existing operations than they do before entering a market, and not integrating the risk assessments by different functional areas such as internal audit, compliance, and IT. The result is that many companies lack a consolidated picture of all the risks they face.

In each emerging market, companies need to consider all relevant, high-impact events that could adversely affect their ability to achieve their business objectives. An effective risk management process should identify both the risks of loss (such as the theft of intellectual property), but also risks that could prevent the company from generating the business value it anticipates (for example, by failing to integrate successfully an acquired company or by having unexpected competitors enter the market).

Deloitte member firms have termed companies that achieve this level of risk management Risk Intelligent Enterprises™*14. These companies address the full spectrum of risks they face, both before entering a market as well as for their existing operations. Rather than focus on single events, they take into account risk scenarios that consider the interaction of multiple risks. Individual risk assessments conducted by different areas of the business are integrated into a consolidated view of risk. They focus on calculated risk-taking as an essential means for value creation, rather than solely on risk avoidance.

The 2007 study found that many manufactures have substantial work to do to achieve these higher levels of performance and risk management capability in their emerging market operations.

Disciplined Process Required

When asked about their overall assessment of risk management at their companies, 73 percent of the executives said they were confident in their abilities to effectively manage the risks in emerging markets. But despite this confidence, many companies are not following a disciplined risk management process and their performance reflects it.

Only 56 percent of executives said their companies conducted a very rigorous risk assessment before investing in an emerging market. Even among executives from larger manufacturers (those with $1 billion or more in annual revenues), only 64 percent reported using a very rigorous risk assessment (Exhibit 10). When it came to assessing risk in emerging markets for existing operations, less than half of all executives said a very rigorous assessment was performed.

Yet, executives at companies that did conduct rigorous risk assessments were more likely to be confident about their ability to manage the risks the face in emerging markets. Among executives surveyed at companies that conduct rigorous risk assessments before investing in an emerging market, 80 percent said they were very confident about their ability to manage risks, compared to 64 percent of those at companies where the assessments were not as rigorous (Exhibit 11). For existing operations there was a similar gap-80 percent of executives at companies that conduct rigorous assessments were confident in their risk-management abilities compared to 65 percent of other executives.

When it came to individual risks, roughly three-quarters of the executives said their companies conducted a very rigorous assessment of risks associated with the supply chain, legal/regulatory matters, and business continuity before investing in an emerging market (Exhibit 12). But many companies appear to conduct relatively little analysis of some high profile, and potentially crippling, risks. For example, only roughly one-quarter of executives said a rigorous assessment of terrorist threats or natural disasters was conducted before entering an emerging market; even among companies with $1 billion or more in annual revenues, 10 percent of executives said they didn't examine risks associated with terrorism at all.

Not only should risk assessments examine closely a list of familiar risks, they also need to consider any relevant, high-impact development that could potentially prevent the company from achieving its revenue and operating goals. These will include not only familiar threats, such as natural disasters or geopolitical change, but also risks specific to each market, such as understanding customer preferences. Some companies have made the mistake of assuming that customers in emerging markets have similar needs and preferences to those in North America or Europe, and have failed to adapt their products and services to each market's specific requirements. The challenges of designing an effective talent management strategy and choosing an appropriate operating structure, which are discussed in detail in the other sections of this report, pose additional significant risks.

Companies operating in Russia need to take account of severe winter weather, poor logistics, and the vast size of the country that can combine to derail construction schedules and slow the delivery of components and raw materials. In many emerging markets, corruption is a significant problem, and companies need to conduct careful due diligence before entering. U.S. companies have the additional challenge of ensuring they comply with the stringent requirements of the Foreign Corrupt Practices Act.

Successful manufacturers go beyond simply seeking to avoid or minimize downside risks to consider strategic risks as well, such as the entry of new competitors or the possibility that market projections prove to be incorrect. Such a wide-ranging analysis should not only be conducted before entering a market, but should also be standard operating procedure after an operation is up and running. For example, Johnson & Johnson conducts an annual risk assessment for each of their operations, including their operations in emerging markets. Periodically, they also conduct an independent risk assessment, usually by another division in the company, to ensure objectivity and gain a fresh perspective on any risks that might have been overlooked. Sandra Peterson, President of the Bayer Healthcare Diabetes Division, says they conduct quarterly risk assessments for each of their operations that ask, "Where are we compared to the goals and assumptions established when we decided to enter this market?"

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