Europe is a massive market. The 28 EU countries collectively represent one of the world’s largest economies, generating ~$20 Trillion in GDP. The EU is the third largest population center after China and India. It is also one of the wealthiest parts of the world.
So why have so many companies struggled to grow there?
Driving top-line growth in Europe.
In the summer of 2015 the Alexander Group initiated a study to understand the challenges and best practices for driving top-line growth in Europe. We interviewed over thirty executives with revenue responsibility for Europe, EMEA or Worldwide. We discussed the initial study findings among 16 leaders at our European Growth Summit held in October in London.
Common sense tells us top-line growth plays a critical role in value creation. A recent study backs this up, which found revenue growth accounts for 58 percent of total shareholder return for top performing companies in the long run. Revenue growth easily outperforms other value creation strategies including cost reduction, cash flow improvement and multiple expansion.
This article summarizes the key challenges of driving top-line growth in Europe and is the first in a series based on our research.
A worrisome trend
A simple comparison of the S&P 500 and the Euro Stoxx 50 (an index comprising the 50 largest publicly traded European companies) indicates a worrisome trend. For over 20 years these indices followed in lockstep fashion. But from 2009 onward, they began to diverge, with one outperforming the other by 4x.
What might explain this variance? It could be a variety of factors including monetary policy, levels of VC funding, differences in risk profiles and labor laws impacting corporate agility, among others. To be fair this comparison does not take in to account public companies in Europe beyond the top 50 or privately held companies including many “hidden champions.” Economic theories aside, for the Alexander Group and our clients, the variance begs another critical question:
What role can the customer-facing part of the business (i.e., marketing, sales and services) play to improve growth, help close this gap, and restore the performance of these stalwart companies to parity with their S&P counterparts?
“Europe” – a convenient term for a complex area
Despite size and allure, Europe is often underestimated, misunderstood and even overlooked. As one study participant shared, “Ironically, Europe, despite its size, has been starved for investments. The money tends to go to other “high growth” areas rather than this core market.” Another participant spoke to a key reason for this, “There is a high cost of entry to drive locality in these markets. You have to make lots of individual investments rather than one large one.” Another commented, “You can’t predict ‘European’ behavior. It doesn’t exist. You have to approach and understand each area (i.e., country) individually.” As we learned, even the term ‘Europe’ is a misnomer. Most organizations structurally lump all of Europe with Africa and the Middle East. ‘EMEA’ is a more common geographic theater than Europe. Even the definition of the term “Europe” comes under fire. In fact, the first question study participants routinely asked was, “What do you mean when you say Europe?” Is it the 28 member countries of the EU? Is it the Western, Southern or Eastern portions? If so, what countries, exactly, would that include? As it turns out, “Europe” is a convenient term for a complex area. Consider some of the differences:
Given these vast differences, many sales investments must be localized, taking into account the lingual, social and cultural differences of the customer. In other words, go-to-customer initiatives must be undertaken at the country and in some cases sub-country levels. As one study participant stated, “It’s like having to customize your model for every state in the U.S.” This poses a significant challenge for companies trying to create a model that is both close to the customer and cost effective. And too often it results in individual country “fiefdoms.” Variance is the enemy of scale. Complexity adds cost. One executive commented, “We are trying to drive scale without destroying the localization, because obviously the country has the best knowledge on market specifics and what to do there.” While productivity levels are roughly equal between the mature markets in Europe and the U.S., the cross-industry average cost of sales is 20 percent higher in Europe. This is due primarily to the need for additional management and support resources and higher benefits and social costs.
Shifts in Buyer Behavior
The challenge of covering Europe is made greater in light of the sweeping changes occurring in buyer behavior across most B2B environments. The Technology industry is shifting to ITaaS and Cloud. Manufacturing is impacted by Industry 4.0 and IOT (the Internet of Things). Healthcare is experiencing a game changing shift to ACOs, IDNs and reform. In Media, the shift to digital is causing a revolution in traditional print business models. Buyers have more data, are smarter and are buying differently. This is fundamentally changing the game. One study participant shared, “I think we’ve found a shift in the market where customer intimacy and an ‘outside in’ model is key. In the old world, pre-financial crisis, vendors would tell customers how to spend their money. Today, customers are saying, “This is what I expect from you.” Like it or not, the sales organization must evolve and adapt to these changes.
Winning in Europe
To succeed in Europe, revenue leaders must first acknowledge the complexities of the markets within, and carefully consider the best go-to-customer approach. Too many leaders err in both their planning and execution of growth strategies in Europe because they miscalculate the degree of localization. In many cases they underestimate its importance. In other instances, they over estimate, and give too much flexibility to local leadership, adding unnecessary complexity and duplication. The next article will unpack the insights on the value of localization and how to balance local market knowledge and leadership in your growth efforts.
Original author: Paul Vinogradov