BCG Review

In the Issue

BRIC Automotive markets: deepening localization? See p. 13

Successful Customer Experience management, see p. 17

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Dear Readers,

With 2009 behind us, we look back on a year that was challenging for both individual enterprise and for society as a whole. Now, 2010 brings some cautious optimism as green shoots of recovery appear and a number of major economies, including Russia, prepare for modest growth.

Regular readers of BCG Review will know that we have adopted a careful stance in discussing the development and challenges of the crisis. We have looked beyond symptoms to study fundamental drivers, working to provide clear guidance on actions that must be taken to first survive, and then to win, in these times of uncertainty.

This reflects the objectives of BCG Review: to stimulate thinking around the key challenges with which our clients in the CIS are confronted, while offering clear, actionable strategies for those clients to follow. Topics vary, representing a mix of BCG global reports, local studies and sometimes even older perspectives authored by our founder, Bruce Henderson, that,—despite their age—remain current in addressing the fundamentals of creating competitive advantage.

In this issue we share our view on the prospects for growth beyond the current crisis. We argue that beneath slow global growth lies the possible development of a “two-speed” world, a world characterized by slow growth in developed economies and relatively high growth in many of the so-called rapidly-developing economies, including Russia.

With the developed world continuing to claim such a large slice of the economic pie, overall global growth will likely remain depressed for some time. Nevertheless, companies that want to grow must gain market share, and so the management and strategies of all companies will be placed under enormous stress, thus accelerating industry restructuring.

2010 will be a challenging year, but there should be ample opportunity for some companies to create an advantage and to accelerate out of the downturn faster and better than others.

We wish you good reading!

Jan Dirk Waiboer

Partner and Managing Director,
BCG Moscow

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In the Issue

The 2009 Value Creators Report: Searching for Sustainability. Value Creation in an Era of Diminished Expectations, see p. 17

Doing More with Less. Increasing Fixed-Asset Productivity in the Downturn and Beyond, see p. 22

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In the Issue

Is this the end of consumption?
Is there escape from the downturn?
Are brands dead?
Is there time for strategy?
You will find answers to these and other questions in the article Seven Myths of the Downturn, p. 15

Global wealth declined for the first time since 2001, falling in 2008 by 11.7%, and the return to the level of 2007 would take about six years. We have developed strategies that will help to take advantage of the flow of clients and assets.
Global Wealth 2009. Delivering on the Client Promise, p. 19

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Women will drive an incremental $5 trillion in global spending in the next several years, which represents the most important commercial opportunity in our lifetime, greater even than the rise of the consumer economy in the developing countries. Our study explores this phenomenon and how companies can respond to it in order to gain respect and loyalty from female consumers.
Women Want More. How to Capture More than Your Share of the Female Economy—see p. 17

Our experience shows that many CIS mining companies often fail to properly analyze costs spent for heavy mining equipment that usually account for a significant share of capital investment. This happens mainly due to the lack of a comprehensive, data-driven approach that comprises the key variables and their mathematical relationships. The total cost of ownership (TCO) analysis may be a powerful tool to support the proper selection of equipment and considerably reduce operating expenses. Our study highlights the critical factors of successful implementation of a TCO approach and benefits out of its adoption.
Equipment Management at CIS Mining Companies. Total Cost of Ownership Analysis—see p. 21

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In the Issue

The potential for rail operators to attract airline passengers and vice versa pales when compared with the opportunity for both rail and air providers to lure passengers currently traveling by automobile. Our study suggests that both airlines and railways could win far more passengers by focusing on that untapped opportunity than by trying to steal market share from each other.
Planes, Trains, and Automobiles. Crossing Paths in European Travel—see page 15

Layoffs and salary caps do not necessarily help reshape a company. Indeed, by opting for quick cuts some companies are seeing a decline in employee morale and a weakening of competitive muscle. Such companies could become leaner and more agile if they were to make more fundamental fixes to their organizational structure.
Flatten Your Organization. Delayering™ your organization during the crisis while keeping employees engaged—see page 21

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In less than ten years—as the demographic data tell us—people will be the scarcest resource for companies. As a result, many companies may be unable to secure the skills that they need in order to succeed. Others may find that their best talent has left—having either retired or been recruited by rivals. And yet others may find it difficult to hire good people, not necessarily because of a paucity of talented workers but because of their own reputation as poor managers of their staff. The reputations of many companies have already been damaged by how they have treated their employees in this recession: employees remember how they were treated in tough times, and many vote with their feet when the economy improves.
Creating People Advantage: How to Tackle the Major HR Challenges During the Crisis and Beyond, page 15

Our experience shows that well-executed lean programs can cut production cycle times and quality costs by half, increase productivity by 10 to 30 percent, and reduce inventories by 30 to 50 percent. What’s more, quick wins can deliver a large share of these savings. The problem is that lean efforts are rarely implemented thoroughly and effectively, and companies often slip into costly bad habits that prevent them from achieving or sustaining results. To get your lean efforts back on track, refocus on the basics and correct the bad habits that are undermining results. Besides generating much-needed cash, you’ll make your company stronger and better positioned for the upturn. Here you will find six actions to take now.
Lean in a Downturn: Six actions to take now, page 19

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Dear Readers,

The beginning of June was marked with St. Petersburg International Economic Forum. Despite the difficulties currently faced by economies and businesses of many countries, over 2000 guests attended this event.

The agenda of the Forum was obviously dominated by the current worldwide crisis and its consequences for the development of Russia. Almost at each meeting participants discussed the current situation from various perspectives, analyzed the measures being taken and proposed new steps. Numerous informal discussions also proved that current issues of businesses are strikingly different from those that were important just a year ago. Focus on performance and efficiency has replaced the urge to keep up with the market growth. We also see this in our daily work: our current client work is dominated by restructuring and understanding of what may be the best business-model beyond the crisis for those who survive.

Companies and their customers have undergone significant changes in the last 12-18 months. It is already clear that customers’ behavior and expectations now are not what they used to be and new approaches should be developed to win them. You can learn more about it from the article Winning Consumers Through the Downturn.

During one of the Forum’s breakout sessions "innovation" was discussed. The capability to bring innovation to the market, along with technology, will certainly be a growth engine for the economy in the future. We have developed this view further—please read the Innovation’2009 article in the current issue of BCG Review.

Regards and have an exciting reading,

Stephan Dertnig

Chairman
BCG CIS

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Dear Readers,

The external environment around the world and in the CIS remains challenging, and those who were expecting a quick recovery have been disappointed. In February 2009, the Russian Industrial production was down by 13% vs. the previous year and the consumer confidence index dropped from 0.4% in 1Q 2008 to -35% in 1Q 2009—hitting a record low not seen since 2000.

All eyes are now on the price of oil, scrutinizing its daily ups and downs. A recent BCG analysis of the Russian economy under different oil price scenarios casts some realism on irrational hopes of a quick recovery. We reached a conclusion similar to Aleksey Kudrin’s, Minister of Finance: even at oil price levels substantially higher than today’s, the Russian economy is unlikely to enjoy conditions as favorable as before the crisis, and at current levels of public spending the reserve fund is likely to be exhausted by 2010.

In this issue, we highlight recent developments in the oil & gas sector, so critical to Russia macro-economic performance. The shifts that have been seen in this sector over the past decade create significant opportunities—and risks—in exploration and production for all players. In the article Upstream Oil and Gas: A New Value Proposition we propose specific actions that not only address the near-term challenges energy companies face but also those that can enhance their longer-term strategic positioning.

The second topic we cover in this edition is a BCG experience report hot from the client front. Cash is a king and companies in industries as diverse as metals, mining, automotive, machine building, consumer goods, and power are looking for ways to generate additional cash from operations by reducing required working capital. The article Optimizing Working Capital—Milking Your Hidden Cash Cow shows the common thread across the industries mentioned above and the observed methodologies that were successfully applied as well as the organizational changes that were implemented to release cash from operations—and make these gains permanent.

I hope you will find both these articles stimulating, and I wish you enjoyable reading.

Ewald Kreid

Partner and Managing Director
BCG Moscow  

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Dear Readers,

Before presenting the latest issue of the BCG Review, I would like to draw your attention to the enclosed April release of HBR Russia. In particular, I recommend "Seizing Advantage in the Downturn," written by senior BCG partners David Rhodes (London) and Daniel Stelter (Berlin).

This article is based on BCG’s "Collateral Damage" series that analyzes the current crisis, explores opportunities opening in this downturn, and describes potential opportunities for companies.

Planning is essential in selecting the correct path for development. However, planning during a crisis, without clear vision, is difficult. Our suggested approach to planning in this current crisis is outlined in a second article in this release of HBR Russia: "Emergency Planning," written by Dr. Thomas Herbeck, partner and managing director of BCG’s Moscow office.

Fair or not, leaders of companies—and countries—are closely scrutinized during their first 100 days in office. This is particularly true in times of crisis. Please read "Leading out of a Downturn: The First 100 Days" in the current issue of the BCG Review for insights on the successful CEO's agenda for the coming months. A well-planned approach that helps lead an organization out of this downturn should help galvanize that organization and set a positive tone for the future.

CEOs are always looking for good business opportunities. We present here the findings of a joint UBS Investment Bank and BCG survey—"M&A: Down but Not Out"—describing the resilient attitude toward mergers and acquisitions of more than 160 executives of publicly listed European companies.
  
 
 
Stephan Dertnig

Chairman
The Boston Consulting Group CIS
 
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Dear Readers,

The crisis is hitting Russia and at the same time its impact is becoming more prominent in the Russian news: January saw Russia's GDP drop by 8.8% vs. January last year with A. Kudrin (Finance Minister) not envisaging this improving soon and certainly not in 2009. Oil prices are not likely to recover in the near future either. Against this background politicians, government officials and the business community implement turnaround programs often focused on cost cutting, which, whilst good for individual companies leads to an acceleration of the downward spiral. When considering the current situation Elvira Nabiullina, Minister of Economic Development stated that the government's current anti-crisis measure still require some refinement.

In this issue of The BCG Review we publish a brief overview of the measures proposed by BCG for the government in fighting the crisis in Russia. This is based on a stress test of the economy, an analysis of key risks and the financial constraints Russia may face. We list a range of measures aimed at restoring trust in the financial system and also supporting the real economy, at least selectively.

From a global perspective we present the 2009 findings of a BCG study aimed at identifying and following companies with the most dynamic development from RDE countries—so called Global Challengers. These companies gained leadership in global markets very rapidly and are turning into a threat for long established leaders and incumbents. The 2009 list of Global Challengers includes six Russian companies. These companies grew rapidly in 2007/2008, but now face the financial crisis. However, with the right measures in place we believe some of them are well positioned to become important players in overcoming the crisis in Russia.

An economic crisis leads companies to consider options for cost cutting and cash accumulation in order to survive; especially in the context of shrinking capital markets and the weakening financial sector. In our article “The Power of Cost Transparency” we demonstrate potential ways of saving significant costs in order to become well positioned to win in the crisis.

Our view is that a crisis is always an opportunity - it reveals the weaknesses of the past and can also inspire companies to expand beyond their previously assumed limits. With this sprit in mind, we wish you an interesting read.
  
 
 
Stephan Dertnig

Chairman
The Boston Consulting Group CIS
 
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Dear Readers,

As business starts up again after the New Year break, it is all too evident that the Russian economy is experiencing a “hard landing” after a long period of commodity-driven growth. So far, the unfolding economic crisis in Russia has lacked a single dramatic event such as the government default of 1998 or the bankruptcy of U.S. investment bank Lehman that shook the global financial system. But there can be no doubt about the magnitude of the situation, and we can already see how the crisis is reshaping Russia’s corporate landscape, the rules of the game for supply, intermediation, and demand, and the role of the state in the economy across sectors.

In this year’s first issue of BCG Review, we highlight two sectors of the economy that have been hit particularly hard by the crisis in Russia and that we work in extensively: the banking industry and the automotive industry.

The article “Russia's Banks: the Proven Anti-Crisis Strategy” is a concise review of the most important measures that can help banks strengthen their competitive position during and after the crisis. These measures can help by reducing costs by 40-80 percent and increasing profit in one segment by 35 percent.

“Crisis in the Russian Automotive Market—a Call to Increase Localization” presents the results of a study we just completed as part of a global series on the BRIC economies. Prepared by a team of experts from both our global and Russian automotive practices, the study contains a number of unexpected findings. Dr. Nikolaus Lang, one of the study’s authors, makes an interesting comparison between Russia, China, and India and points out a number of areas where this country still needs to catch up to increase its competitiveness.

Finally, almost 40 years after the original creation of the famous BCG matrix, we revisit the concept in the article “The Return of the Cash Cow.” As external funding opportunities evaporate, we predict that the good old cash cow—be it a product, segment, or division that generates internal cash flow to fund growth elsewhere—will be seen in new light.
  
 
 
Ewald Kreid

Partner and Managing Director

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Dear Reader,

After receiving very positive feedback on our last issue of the BCG review, we decided to devote this issue to the upcoming crises as well—however this time more as a “call for action” rather than a description of what is happening.

Everybody remembers the 1998 crisis in Russia: sharp devaluation of the Rouble, decreasing consumer demand, and switching to consumption of local production—but just a year later the boom started. What do the current times and '98 have in common? What is better and what is worse? John Lindquist, senior advisor and one of the founders of our Moscow office with 15 years of experience in Russia has granted us an interview on this topic.

As the current crisis unfolds all over the world, I would like to present a piece by Steve Gunby and Ron Nicol, both senior partners in the United States—“Driving Success in Turbulent Economic Times”. Already, last summer, while watching the U.S. economy, they were making suggestions on how to navigate through difficult times. Based on international client experience, they argue that there is significantly more near-term economic potential in these times than commonly perceived.

Finally, the second piece, “Russian Crisis II—From Paralysis to Action”, is our crisis-update where we follow the crisis unfolding in Russia, try to predict its potential path, and suggest three ways to master the crisis: ensuring the financial health of your company, protecting your existing business, and managing for growth. In other words—ensuring survival from a cashflow perspective, leveraging your best customers and best-selling products, and prepare for future moves.
  
 
 
Stephan Dertnig

Chairman
The Boston Consulting Group CIS
 
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Dear Reader,

Following recent events we have devoted this issue of the BCG Review entirely to the worldwide liquidity crisis, and what it will mean for CIS and Russia in particular.

I would like to draw your attention to an article by Bruce Henderson, "Cash Traps", which BCG published more than 35 years ago. Revisiting it in detail, it becomes clear that his thoughts are of utmost relevance today - and especially in the unfolding liquidity crisis. With many companies searching for cash, and the few cash-rich ones dominating the upcoming changes, it is key to understand where cash is trapped in your organisation and how to use it more productively.

The second piece we have selected for you is our brand new paper: "The long-term perspective to beating Russia’s liquidity crunch", where our international team has looked at the emerging situation in Russia, its origins, its potential impact on the economy, and what companies can do in response. While we currently are working on similar issues around the globe, it is important to understand that the crisis in Russia will accelerate the change of industry structures to a greater extent than in most countries worldwide: it is a decisive time to make the right choices, not only to cope with short-term emergencies, but from a long-term view on how to react to changes in the landscape of your specific industry.

Breaking the compromise between short-term survival and long-term growth is more difficult in Russia than in developed markets. While the downswing might be severe than many players expect, the following upswing may also be more beneficial. A combination of using proven concepts (e.g. "cash trap") and thoroughly stress-testing your business model seems the best way to navigate through the current market turmoil. By drawing on our best resources and expertise worldwide, BCG is well suited to support you in these difficult times.
  
 
 
Stephan Dertnig

Chairman
The Boston Consulting Group CIS
 
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Dear Reader,

A sound business strategy is the driving factor behind long-term business success. While our whole business is built around this belief, some think in our days this is less true, as they think the future has become less predictable. We have heard that strategy is not important anymore, and that management should concentrate more on quickly reacting to changes in the market.

While it is true that for some companies survival has become an urgent issue, without a sound strategy in place, any reaction will simply be opportunistic. We think developing the right strategies now are essential—particularly the strategy to survive and the strategy to prosper in the long term. We have devoted this issue of BCG Review to the diverse aspects of strategy.

The article “Does Your Strategy Need Stretching?” covers the results of a recent global BCG study that examines how leading companies have changed their strategy development along three dimensions. Leading organizations are now applying different time perspectives and different tools to discover new opportunities.

Can BRIC markets be the solution for multinational players looking for growth? In “Oil Retail: What It Takes to Win in the BRIC Countries” you will find insights on developing and realising winning strategies in emerging markets. Although this piece focuses on fuel markets, it is an interesting lesson that can be applied to many products. Recent BCG analysis found that these countries will undoubtedly drive growth, but they also come with the risk that they will rapidly transition to less profitable, highly competitive markets.

Finally the “Portfolio” explores one of the classic BCG concepts. Do you remember the cash cows, stars, dogs, and question marks? Developed by Bruce Henderson in 1977, the growth-share matrix is still relevant today—with cash stripped companies around the globe, probably more than ever. Also in this issue, you will learn about another of Bruce’s creations—the opening of the original Boston office of BCG.

We hope you will enjoy the magazine!
  
 
 
Stephan Dertnig

Chairman
The Boston Consulting Group CIS

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A recent BCG analysis of the retail oil markets in BRIC countries revealed some sobering findings.

Dear Reader,

Ideas and innovation, the heartbeat of business, are fueled by intense discourse. With this first volume of BCG Review, presented to you with the current issue of Harvard Business Review, we invite you to an intense discussion of business trends, global challenges, and local opportunities.

An innovation itself, this volume aims to stir up discussion on the art of making innovations succeed in terms of competitive advantage and profitability.

Highly successful at a global level, rapidly changing and taking on the role of a growth engine for the world, Russia and Ukraine comprise one of the most impressive hot spots of global business.

Working in Russia since the early 1990s and moving into Ukraine ten years later, The Boston Consulting Group has developed growth strategies and business solutions with a wide range of clients in the region.

A BCG team led by the eight partners in our Moscow and Kiev offices works within our network of more than 6,000 consultants in 66 offices around the world to create and implement state-of-the-art solutions. BCG, one of the world’s fastest-growing management consultancies, is proud to be actively engaged in one of the world’s most dynamic growth regions.

We hope you will enjoy the magazine, and we would love to discuss your ideas on a one-to-one basis. 
   
 
Hans-Paul Buerkner

President and CEO
The Boston Consulting Group

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