A new BCG report analyzing Russia’s most innovative companies suggests that being able to react quickly to changing economic conditions and being able to attract the best and brightest talent are two of the most valuable traits of innovators in emerging markets.
An Ozon.ru employee in the company's central office in Moscow. Photo: ITAR-TASS / Maksim Shemetov
As Western pressure builds to enact sanctions against entire sectors of the Russian economy, it will force Russian companies to rethink their business strategies. It will force them to consider new export markets, find new supply chain partners and explore new ways of circumventing potential bans on certain financial transactions. The old ways of winning for Russian companies – relying on the growth of a new consumer class in Russia’s biggest cities and profiting from the emergence of new market opportunities via global trade liberalization – may no longer be enough.
On July 10, international consulting firm Boston Consulting Group (BCG) released a comprehensive, 27-page report on the Top 50 innovative companies in emerging markets called “How Companies in Emerging Markets Are Winning At Home.” Included in the list were four Russian companies – Ozon.ru, Mail.ru, Bashneft and Tinkoff Credit Systems Bank. All of them might be considered part of Russia’s growing cadre of “innovation champions” – the companies performing at the highest levels, delivering the highest returns to stakeholders, and establishing new best practices for other companies to follow. Their collective experience in navigating the Russian market over the past few years might be used as models for Russian companies concerned about the looming impact of economic sanctions.
Companies that made it into the BCG Top 50 were chosen for their ability to “operate at warp speed,” their ability to “adapt to uncertainty and circumstance,” and their ability to “build talent engines.” All three of these factors have immediate implications for the current situation that Russian companies face – an uncertain geopolitical situation, the need to react quickly to changing economic conditions and the premium placed on the ability to attract and retain top talent in order to prevent a “brain drain” abroad.
For example, on page 18 of the report, BCG profiles e-commerce company Ozon.ru (think of it as a Russian Amazon.com, controlling 63 percent of the online book market in Russia) for its ability to “adapt to uncertainty and circumstance.” The company successfully addressed two major problems within Russia – “slow, unreliable postal deliveries” and “low credit-card usage” – and turned those problems into advantages. Ozon.ru has created an alternative distribution network that almost entirely bypasses the Russian postal service and has invested in electronic payment technology to attract customers wary of paying with plastic rather than cash.
And, there are also encouraging signs for Russia’s oil and gas sector, which continues to be the most important component of Russia’s economic growth. It is, after all, Russia’s oil and gas companies that will be constructing massive pipelines to China as part of the nation’s pivot to Asia and Russia’s massive $400 billion oil deal with China. On page 10 of the report, BCG gives credit to Bashneft for “shaking up the largely state-owned oil-and-gas industry by reinvigorating exploration and production in legacy regions and launching new projects.” Over the past five years, Bashneft has boosted output by more than 37 percent while simultaneously modernizing and improving the efficiency of its refineries.
There’s still plenty of hard work ahead as Russia works to modernize its economy. Of the BCG Top 50 most innovative companies in emerging markets, only four are from Russia – and that was before the latest call for stronger Western sanctions against Russia. By comparison, other nations in the BRICS fared better: China had ten of the Top 50 companies, India had eight, and Brazil had five. Moreover, there were no companies included from Central Asia or from any of the nations in Russia’s new Eurasian Union – a troubling sign if Russia ever hopes to build a competitive trade bloc with neighbor countries like Kazakhstan.
Ultimately, success in any emerging market is a direct function of being able to attract the best and the brightest. BCG refers to this as the ability to “build talent engines.” The best, most innovative companies find a way to “hire top local talent and build an engaging and rewarding environment so that the hires will stay.” They focus on training these workers and developing leaders, and most importantly, do not give them any reason to travel across borders in search of more rewarding economic opportunities. That’s going to be a critical issue for Russian companies going forward – how do they continue to attract and retain the best talent and prevent a massive “brain drain” out of the country?
Taking a big picture perspective, though, and it’s clear that one of Russia’s main advantages may be its access to the growing business sophistication of companies within the BRICS. As BCG notes, the BRICS will remain the primary economic growth engine of the world for years to come. It’s worth noting that 27 of the Top 50 companies were from BRICS nations. The only question, though, is whether the BRICS can act cohesively when it comes to trade and economic development - especially when one of its key members is under pressure from the West. Russia is about to find out.