Inefficiencies in third world markets

- By Leo Alarcon    Share    

Third world countries and emerging market businesses usually have different standards of operational efficiency, safety and face different competitive environments than those in developed western economies. Usually technologies aren't as developed or embraced as first world economies due to the cost of labour and education being lower, a lighter burden of OH&S red tape, and lower law and taxation compliance costs. These are major cost competitive advantages relative to developed countries which have fuelled growth in manufacturing industries throughout Asia, India and other emerging markets.

Many multinational and western companies are entering emerging markets to take advantage of an emerging middle classes and vast consumer markets. During their entry and setup of operations into many of these countries in particular south east Asia they are confronted with labour markets which lack depth in technical knowledge, inexperienced local staff, inefficient infrastructure and lack of support services. Some find it difficult to establish efficient smooth running operations.

Knowledge and skilled staff key to competitive advantage

So how can astute business managers take advantage of these efficiency gaps compared to developed western economies? A popular approach by many large organizations is to bring in talent and experienced professionals into these regions to help setup and then run operations as expatriates. These professional usually bring a depth of experience and business systems which are hard to find in less developed economies.

If the use of expatriate staff from other better developed economies or operations in other regions is too expensive, operations consultants may be engaged from multinational firms operating in the region. This option is only cost effective if the need for these consultants is short term.

Knowledge is one of the most significant deficiencies where expatriate professionals work with the local work force in imparting knowledge in a variety of areas. Even before hiring local staff most companies will ensure they can speak English or the local language where the company or head office is originally based, as well as possessing formal or tertiary qualifications. This is done not only to make it easier to communicate with expatriate staff but also staff with these skills and qualifications will usually be better equipped to adapt to western business and work culture as well as structured systems and technology.

In some countries knowledge and education can be inconsistent between cities and towns as well as educational institutions. In a few of these countries where corruption is a major problem there have been cases where students have bought their way to attain formal qualifications. This is why multinational companies only offer skilled and most managerial positions to graduates of top education institutions or those who possess quality overseas qualifications and professional experience after a thorough interview process.

This is why investing in knowledge and expertise is essential to establishing and running operations. Many multinational and large national companies in developing economies have international experienced staff or foreign educated managers rather than locally grown talent. This in the long run helps to establish superior efficient operations.

Inefficient Infrastructure challenges

Infrastructure is usually a major challenge in developing countries as roads, ports and rail networks are not well maintained and under developed in some cases making it lengthy or costly to deliver products to market and access to raw materials. Therefore positioning and access to major cities, industrial parks and highways is important. Some larger businesses will also have regional warehouses that are further away from the production plant or supply source to service areas locally instead. Although carrying more inventory and having a decentralized distribution system is not consistent with lean operations but the extra warehousing and logistics costs may outweigh the cost of lost sales and stock outs.

Inefficiencies can be opportunities

Although many businesses are currently far from efficient in the used of labour, inventory management, process layout, purchasing and selling systems, data analysis, strategy etc, there are opportunities for international firms and astute investors with the right capabilities to extract value if the market and business environment is studied and understood well.

Another useful strategy employed by large companies and multinationals in developing countries is to employ senior well connected local staff to aid in processing business, planning permits and licenses. In some countries applying for permits is not a transparent process but having experienced local staff assist in the process to deal with local government agencies and ministries can prove an advantage. Although friendships and partnerships are extremely important in business, care must be taken not to contravene corruption laws that can carry heavy penalties.

The implementation of many lean manufacturing techniques and principles in operations as well as investing in modern plant and equipment can definitely yield improvement in the cost base and the quality of products and services provided to customers. This combined with the right knowledge and skill base will further enhance the business' competitive advantage and cost position versus other competitors.

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