"Black Monday" is a Wake-Up Call for 2016 Business Planning

Financial markets around the world have been reeling the past few days, but there are many useful takeaways for business leaders amidst the noise. As Frontier Strategy Group's global head of research, my work bridges the economist's perspective on international finance with the more operational (one might say more practical) lens of executives at multinational companies. In this note I'll start with the first perspective, then move to the second.

China is the proximate cause of this week's volatility, with the Shanghai index posting its worst one-day loss in eight years, destroying more than $1 trillion of paper value in four days. The Chinese government's extreme interventions in market trading, a second interest-rate decrease, and sudden currency devaluation are causing more concern than confidence in the economic fundamentals of the world's second largest economy.

But there is much more to the story. FSG's Global Economics team has been tracking the interactions between currency volatility (with Kazakhstan and Vietnam outpacing China's devaluation), continued pressure on oil prices (WTI dropping below $40 a barrel for the first time since 2009), and the expected move by the U.S. Federal Reserve to raise interest rates in September (increasingly uncertain). None of these are good news for headline GDP growth in emerging markets, and together it feels like a perfect storm of bad news. No wonder the financial press is full of scare headlines.

Setting aside the ups and downs of market psychology, what does all this mean for the real economy in which your business operates?

• Growth is softening even faster than expected, in both emerging and developed markets. The trend is not surprising. In our 2015 Global and Regional Outlooks at the beginning of the year, we expected slower growth in 2015 in all emerging-markets regions except Asia (where we projected flat growth).  The slowdown is accelerating faster than expected in many markets, and the volatility of economic indicators is disconcerting. When we made the mid-year update to our 2015 Events to Watch report, none of our upside scenarios increased in likelihood.
• Disappointing consumption is a global phenomenon. China's failure to boost consumer demand enough to sustain seven percent growth has prompted disruptive interventions in its stock markets and currency regime, but it is hardly unique. We have revised our 2016 consumer spending forecasts down since the beginning of the year in 37 countries, and revised up in just 18. Weak consumer confidence seems to be outweighing expected boosts in disposable income from cheaper energy.
• There will be no white knight for the global economy. China is running out of ways to prop up investment through debt and state intervention.  Asia and Africa may be outperforming the rest of the world, but they are underperforming expectations and are showing the fragility of their state-led development models. The Eurozone is in the grips of austerity, and the United States is still at the threshold of a return to normal monetary policy.

More than any single driver, the underlying root cause of this market volatility is that there is too much capital chasing too few investment opportunities. It's been characterized by former U.S. Federal Reserve chairman Ben Bernanke as "a savings glut," but that is misleading. Far from there being more capital than the world needs, there is a shortage of compelling opportunities for investors to back. Portfolio investors can't do anything about this, but multinational corporations can.

Rather than reacting to market volatility, take it as a signal to develop more creative, game-changing strategies that will enable your teams to win in slower-growing, more-competitive environments. This is a more complex mandate than finding fast-growing markets and selling aggressively, which has built many emerging-markets empires. It is more complex even than the "pivot to profitability" that we have advocated for three years now.

My message to senior leaders of multinational firms is this: If you want to succeed in the global economy of 2016, rip up last year's strategic planning process. Don't let it be an incremental exercise in revising targets and budgets. Make it an opportunity for your company's best and brightest to reimagine your competitive positioning, product portfolio, and customer relationships in your key international markets.

Here's a checklist of activities we recommend every company address at the regional/country level in the 2016 planning cycle:

1. Focus on pockets of opportunity -- Rather than following the old emerging-markets playbook trying to win big in large, fast-growing markets, target smaller hot zones (customer segments, city clusters, frontier markets) where the competitive landscape and exchange rates are most favorable. Our most forward-thinking clients are planning for 2016 at the city and province level. FSG can help with subnational data for Brazil, Russia, India, and China.
2. Rethink your local product mix -- Millions of customers are finding themselves trading down as their incomes are constrained or they become more risk averse. That makes them open to new brands, so explore product localization, innovation, and packaging changes. Currency fluctuations should prompt a top-to-bottom assessment of your pricing as well. The top end can still pay for value, so we see fresh positioning of premium products working for clients in all industries. If you're in the middle you're in danger.
3. Evaluate international acquisitions -- Savvy emerging-markets-based competitors are stealing market share from many western multinationals, but many are getting squeezed by expensive dollar-based debt and collapsing valuations. Countercyclical strategic acquisitions can transform a foreign company into a local champion overnight (2015 is already the most active year for M&A since the financial crisis). Many local distribution partners are facing a similar financial squeeze. Our distributor performance scorecard is an easy way to evaluate whether you should bring a local partner under your corporate umbrella.
4. Evaluate currency risk with country teams, not just treasury -- The strong dollar won't go away in 2016, but foreign earnings recognition is just the tip of the iceberg among FX challenges. Emerging markets like Angola are joining the ranks of Venezuela, where repatriating profits can be effectively impossible. Currency translation losses for US and European MNCs were 50% higher than the 2013 "taper tantrum" period in Q1 2015, and that has only accelerated. Also, take a fresh look at executive incentives to ensure that regional leaders that might be rewarded in local currencies do not feel that the year is unwinnable regardless of their local-currency performance.
5. Set goals for profitable market-share capture -- Even if revenue growth has been the basis of target setting in the past, ask your local teams to develop plans for growing market share and profitability. This will sharpen their competitive strategy when it is needed most. FSG research shows that "strategic thinking" is a top capability gap among country teams, so get them started early on this.

In an environment of market volatility and slowing global growth, your 2016 plans should capitalize on change rather than just be incremental. The best next step is to take a look at your upcoming strategic planning calendar to sketch out how you could start sooner and dedicate more analytical firepower to the activities listed above.