Leadership Strategy Services

What sort of recommendations should we make to companies seeking to appoint executives with regional responsibilities in Latin America? What characterizes successful leaders in this role? What, if anything, do they have in common? What should be our advice to leaders keen to pursue opportunities at the Latin American regional level?

Global companies are constantly facing the need to appoint key executives to lead their operations in foreign markets, exposing them to a degree of complexity and diversity that they may not be used to.

Several firms seem to have been able to master this process over time (think of the most successful multinational companies with a long history of overseas operations), while others fail consistently. There are constantly new players launching operations in the region that face the difficult task of appointing the right people for the job. Moreover, the requirements and challenges of leadership roles are constantly evolving, as are the demands and aspirations of individual executives.

Maybe the most common mistake made by firms entering a foreign market is to assume that the same business model and management talent strategies that proved successful in domestic operations will work in the new situation. We have seen several cases of dramatic failures resulting from this simplistic approach.

Recognizing regional characteristics

Economic significance
While presently overshadowed by the Asian economies, Latin America remains an economic region of major significance among emerging markets. With 540 million inhabitants and a GDP of USD 4.3 trillion measured at Purchasing Power Parity, Latin America is an important market within the global context. Income per capita in the region has grown at an annual rate of over 4% over the past three years (higher than both the USA and Europe); and forecasts suggest that this figure should remain steady in 2007.

However, the leading Latin American economies have lagged behind the Asian tigers in recent years, and the region’s relative significance in the global economy has declined. In addition, the tremendous volatility of its economic performance, the inconsistency of its economic policies and recurrent crises have given rise to a certain sense of fatigue and skepticism among foreign corporations and strategic investors.

Nevertheless, most Latin American countries are currently enjoying healthy growth, lower inflation and shrinking budget deficits, while Latin American stocks are outperforming most other regions of the world. But many economists worry that the recent improvements in the region, reflecting a favorable economic environment built on strong global growth, high demand for regional exports, booming commodity prices and ample global liquidity, will not last.

The China effect
The economic climate in Latin America has been very favorable over the past four years due to the boom in commodity prices, driven principally by China’s surging demand for energy, raw materials and agricultural products. This has produced a significant increase in Latin America’s exports to China, as well as major growth in Chinese investment in the region.

China’s imports from Latin America soared from USD 3 billion in 1999 to USD 22 billion in 2004, transforming a trade deficit of USD 2 billion with China into a trade surplus of USD 4 billion. Chinese investments in Latin America accounted for 46% of China’s total foreign investment in 2004, with most of this figure focused on infrastructure projects to facilitate the extraction and shipment of Latin America exports to China. By 2015, the Chinese expect their investment in Latin America to exceed USD100 billion.

China’s trade and investment to date has mainly been concentrated in Latin American countries rich in energy, mineral resources and agricultural commodities such as Brazil (soya, iron ore), Argentina (wheat), Chile (copper), Venezuela and Ecuador (oil) and Peru (minerals). Other countries, which produce labor-intensive manufactured goods, are not benefiting from this new relationship with China, as they compete directly with similar products from China, which represent 90% of the Asian giant’s exports to Latin America. Mexico, whose labor costs are triple those of China, is estimated to have lost about 300,000 jobs in its “maquila” industry.

Cultural diversity
Those unfamiliar with Latin America may be under the impression that it is an homogeneous market based on a common language and culture, as well as homogenous levels of economic development, consumer behavior and government policies. Nothing could be further from the truth. Moreover, diversity looks set to increase in the future, making it difficult for companies to operate using the same business model region-wide.

There are 33 countries in Latin America (eight in Central America, 13 in the Caribbean and 12 in South America), each one with its own political, legal and regulatory system and currency. Three main languages are spoken in these countries: Spanish, Portuguese and English, along with French (in the French territories) and 400 indigenous languages, of which 62 are spoken in Mexico alone.

Latin America boasts a wide variety of different racial and ethnic groups, ranging from countries where most of the population is indigenous (like Guatemala, Peru, Bolivia), to countries were most are descended from European immigrants (Argentina, Chile, Uruguay). The countries also have different climates and natural resources: with some rich in oil, minerals and agricultural land, while others rely heavily on their sunshine and beaches to attract tourists. While some nations like Mexico and Brazil have strong industrial sectors, others like Bolivia, Uruguay and Paraguay have very little or no industry. The economic performances of Latin America’s countries also range from success stories like Chile to Haiti and Bolivia, which remain among the poorest countries in the world.

Key issues for the future

Growth with stability
It is not clear whether China will be able to sustain its current rate of growth and, by extension, its current demand for energy, minerals and agricultural commodities. In any case, macroeconomic stability and increased trade offer a platform for progress, not an end point. Latin America should not let the commodities boom reinforce the region’s traditional role as mainly an exporter of raw materials and agricultural products, but should use its increased riches to modernize its economies and improve living standards. The most daunting economic challenge facing the region is to grow robustly and steadily over a long period of time; and to reinvest the surpluses generated by the present favorable global climate wisely.

Quality of institutions defines development
While most Latin American nations oppose military coups and hold that democracy and the market provide the best way to make progress, democratic institutions still have not gained their confidence. Solid majorities lack faith in political parties, legislatures and the courts. Only 25% consider that the law is applied to all citizens equally. Disenchantment with market reforms is also widespread as the economic reforms of the 1990s resulted in poor job creation, higher poverty levels and greater inequalities.

A new generation of democratically-elected politicians rejects the separation of powers and exalts the State as an economic player. These leaders promise to roll back free-market reforms and revive protectionist policies such as nationalizing industries and raising import barriers. Huge profits from natural resources tend to cement autocracies, particularly when these resources are in the hands of the State or an elite which stands to lose a lot from an equal distribution of wealth.

It is not enough to have a democratically elected government: the quality of democratic institutions will be a defining factor in the development of Latin American countries. The resolve and ability of politicians to strengthen these institutions, as well as to implement responsible fiscal and monetary policies, will ultimately determine whether the region’s potential is realized or not.

Social inequality
Despite the region’s ongoing recovery and improved economic prospects in recent years, Latin America still faces the significant challenge of persistent poverty due to modest and volatile growth in recent decades, which has resulted in feeble job creation and flagrant inequalities.

Inequality is greater in Latin America than in any other region in the world, except Sub-Saharan Africa. It is exacerbated by unequal access to institutions, assets, markets, services and social protection.

About 25% of the region’s population lives in poverty (living on less than USD 2/day), roughly the same as in the late 1980s, and 9.5% is extremely poor (living on less than USD 1/day). The median income is 50% of the national average, versus 90% in the developed world, which means that the “middle class” is a long way off the middle. The region will only be making real progress once the gap between median an average income narrows substantially.

The challenge facing the region is to fight poverty through more stable growth, with reduced inequality and greater social inclusion. This can only be achieved by improving investment in health, education and infrastructure. To face this challenge Latin American governments need resources, but their tax base is inadequate. In most of the countries, the richest 10% pay taxes on less than 10% of their earnings, although they collectively account for over 50% of the nation’s total income.

States must be efficient and curb corruption to promote growth and combat poverty through government accountability, civil society participation and affordable welfare systems. They also need to strengthen environmental institutions to promote the effective use of abundant natural resources.

Balancing complexity and costs
Although the size of the region in terms of GDP and population seems to be large, it only represents 8% of the world’s total population, and generally about the same proportion of the revenues of global corporations.

Two countries clearly stand out as strategic players: Mexico and Brazil, which both account for over 50% of the region’s population and GDP. The rest of Latin America presents the dilemma of balancing economic significance with the cost of covering a vast and complex territory.

A superficial look at the region, coupled with the need to keep overhead costs as low as possible, may lead to inadequate organizational structures and job definitions that turn out to be extremely difficult to fulfill. This increases the challenge of finding adequate candidates for the job and the risk of failure in realizing the region’s business potential.

There is a clear need for highly-qualified and flexible leaders to guarantee success in such a complex and volatile environment, as well as candidates with the credibility to gain top management’s trust and support. Given the market size and risks involved, it is not easy for regional bosses to attract top management’s attention at corporate headquarters. Nor is it easy to persuade executives to allocate a more than proportional share of corporate resources to develop business in the region, or adjust global business models to take advantage of the opportunities that the region may offer.

In a recent conversation, the regional leader of a global credit card provider pointed out that the firm’s business in Latin America was growing at over 30% per year, a rate far higher than the company average. However, given that 70% of the Latin American population is not bankarized (i.e. does not make use of any banking service), the possibility of capitalizing on that additional growth opportunity was limited, unless the company decided to develop other distribution channels to issue cards besides banks (for example, large merchants or retail chains). However, this executive found it very difficult to convince a board formed exclusively by people from a country representing over 50% of the world revenues and profits to change its business model to benefit a region with a limited significance within the global context. Needless to say, no change was implemented.

A way to respond to this challenge is by changing the composition, structure and functioning of the regional leadership team. Strategies include:

• Staffing the regional team with people who offer both strong representation/deep knowledge of the region and high credibility at corporate level, who are capable of raising awareness of the business opportunities the region may offer and better negotiating the allocation of resources.
• Designing organizational structures to make full use of the competencies of key executives in the region (for example, by appointing executives with dual roles/responsibilities at a country and regional level) and to reduce overhead costs (for example, by concentrating back office functions in shared services and in lower cost countries)
• Creating a working environment of strong collaboration in which cultural diversity is recognized, represented and leveraged as a competitive advantage.

Finding the best talent
Historically the best managers in the region were found in the multinational companies, and particularly in the USA, which accounted for over 60% of the FDI in the region. These leaders had the best business practices and invested more in developing their human capital, particularly their high potentials.

These companies also used to send executives who showed potential to operate on a global scale to the region as part of their management development programs. Examples of business leaders of large corporations who had assignments in Latin America earlier on in their career include: Alan Belda, CEO of Alcoa, (Brazil), Peter Brabeck-Letmathe, CEO Nestle, (Chile and Venezuela) and Eric Daniels, CEO Lloyds Group (Argentina) just to mention a few.

But this has changed and expanded in recent years with:

• The reduction of U.S. FDI investment and the retrenching of U.S. large multinationals in the region in favor of other areas in Asia and Eastern Europe.
• Some European multinationals with more aggressive growth strategies in the region that are investing more in developing Latin American executives.
• The emergence of a number of Latin American multinationals (“multilatinas”) with the scale, resources and growth rates to offer attractive career opportunities at a regional and international level.

Today there is a significant pool of well-trained executives with multi-country experience and a strong entrepreneurial profile in over 300 companies with revenues in excess of USD 1 billion in the region, versus only 149 companies in 1996.

That group includes approximately 40 “multilatinas” that are succeeding in regional and global markets in sectors such as airlines (Lan), aeronautics (Embraer), beverages (Grupo Modelo, Femsa), cement (Cemex), engineering & construction (Odebrecht), food (Bimbo, Sadia, Maseca, Arcor), mining (VDRD), energy (Petrobras), pulp & paper (Votorantim, Aracruz, CMPC), retail (Pao de Acucar, Soriana, Cencosud, Falabella), steel (Tenaris, Gerdau), telecom (America Movil) and publishing (Norma) .

Defining the competencies that are critical to succeed

Four leadership competencies seem to be particularly critical in Latin America, which ass up to a high degree of strategic influence in defining and implementing a vision:

Strategic orientation
In a highly volatile and changing environment, the ability to articulate the strategic context integrating a variety of information into a coherent vision to quickly identify opportunities, anticipate risks, evaluate options and define priorities, is of extreme importance. It is not about being a visionary, of having a big, airy idea, but about being a visionary leader, i.e. possessing the ability to create a vision that can be turned into an operational plan and linked to a series of initiatives.

Change leadership
After creating a vision, people need to be brought on board, especially in fast changing environment conditions. Leaders need to build and align effective groups, including cross-functional and cross-organizational groups in multiple countries. Top managers need to keep their organization changing with the times in order to deal with volatility.

Collaboration and influencing
In dealing with a culturally diverse team covering a broad geographical base and multiple functions, leaders have to be able to work sideways, to understand cultural differences and bridge them in order to build or find common ground.

Integrity
In an environment where institutions and the culture of compliance is weak, there is a particular need for leaders with clear beliefs, values and ethics, who act in accordance with those beliefs and are willing to put their reputations on the line to defend certain principles. Leaders have to be are able to shape their organization in terms of values and motivate others to enforce these values and beliefs.

In a nutshell, what considerations should be taken into account when appointing managers for Latin America

• Recognize common features and differences in the Latin American region (cultural, administrative/political, geographic and economic)
• Clarify regional strategy or the role the region should play (a mere executor of a global strategy, a specialized contributor in a particular field or a global innovator in a particular area)
• Identify the talent needed and adapt the organizational structure and processes to the kind of talent and skills the firm wants to attract and retain

Companies that leverage cultural diversity as a regional and global competitive advantage by adapting their strategies, organizational structures and systems to harness local talent are the players set to succeed in today’s global market.