Using the wrong strategies in developing and emerging countries could cost German companies several hundred million dollars a year

• Developing countries are planning investments totaling 30 trillion dollars in the B2B and B2C sectors over the next 20 years
• However, this great growth potential for companies is overshadowed by political and economic instability in these countries
• Scenario planning by Roland Berger Strategy Consultants and HHL Leipzig Graduate School of Management helps companies develop strategies for individual markets
• Important factors such as market protectionism and access to resources impact on four scenarios for the future

Developing and emerging countries offer companies great growth potential, for these countries are planning to invest 30 trillion dollars to expand their B2B and B2C sectors over the next 20 years. This will also boost business opportunities for foreign investors. However, political and economic instability is making reliable long-term planning increasingly difficult in emerging markets. In order to avoid making bad investments that could cost them several hundred million dollars a year, German companies should use scenarios incorporating such relevant factors as market protectionism and access to resources to plan their business strategies in the respective markets. These recommendations are made by experts at Roland Berger Strategy Consultants in "The right strategy at the right time for emerging markets," the latest publication in the series "8 Billion Business Opportunities." The study is part of Roland Berger's GLOBAL TOPICS initiative.

"Over the next 20 years the developing and emerging countries are planning to invest around 30 trillion dollars in the B2B and B2C sectors," says Bernd Brunke, Partner and member of the Roland Berger Strategy Consultants global Executive Committee. "This will give local economies a great boost in these countries. However, if foreign companies want to participate in this potential, they must recognize the most important trends in these markets and integrate them into a suitable strategy."

Volatility in markets is a major threat

However, predicting the future development of emerging markets is difficult, because there are several factors influencing their economic situation – ranging from the development of the financial markets to fluctuating commodity prices and also political aspects. For example, the Shanghai Composite Index has fluctuated between 1,500 and 6,000 points over the past five years. In the same period, oil prices have oscillated by some 250% – from 40 to 140 dollars a barrel, and the price of aluminum has swung between 1,400 and 3,300 dollars per tonne. "Such fluctuations have an enormous impact on the production and profitability of many companies. A firm can quickly become uncompetitive when commodity prices rise excessively," warns Roland Berger strategist Brunke.

Political transformations, too, often lead to major economic and social upheavals – as in the case of the Arab Spring of January 2011. Foreign investors are uncertain as to the consequences of such political changes. After all, the volume of business done by foreign companies in the Middle East totals USD 15 billion a year. "Investors are very cautious in such situations, because they fear big losses when the political situation is unstable," explains Brunke.

Four future scenarios for preventing risks

In order to better counteract these potential risks, Roland Berger Strategy Consultants, in cooperation with HHL Leipzig Graduate School of Management, has developed a scenario methodology to help companies recognize important trends at an early stage. Relevant factors – e.g. market protectionism or access to important raw materials – are analyzed and different future scenarios developed for the individual regions. Taking the manufacturing industry as an example, the Roland Berger experts identify four possible scenarios.

• "Antagonistic Age"
  This scenario is characterized by a high degree of protectionism and a low input of resources. Countries that are rich in raw materials primarily develop new production technologies, while resource-poor countries work on alternative materials and achieve a know-how advantage. However, high protectionist barriers make market access difficult for European high-tech companies in emerging markets.
• "Polarized World"
  A regime of powerful protectionism rules here to defend national interests. Resource inputs are high, which particularly benefits resource-rich regions with a large domestic market and promising technologies. Countries like North America, China, India, Russia, Brazil, Australia and the Middle East are at an advantage in this scenario. Resource-poor regions by contrast, such as Western Europe and Japan, will lose out because it is almost impossible to trade freely in commodities or expand production capacity.
• "Squandering Society"
  This scenario is characterized by little protectionism and high resource inputs. Here, the innovation process follows the opposite route from the normal one (reverse innovation): new products are first developed in the emerging countries and then adapted to the needs of the developed economies and exported there.
• "Green Capitalism"
  Developed economies advocate a framework with few protectionist barriers, thus promoting fresh investment and knowledge sharing. The market for renewable energy and alternative mobility experiences a boom; Western countries can export their green technologies to the emerging markets. Western Europe, North America, Japan, Brazil, India and China have an edge in this scenario. The biggest disadvantages are felt by the Middle Eastern countries, whose economies are based on fossil-fuel exports.