Have you got what it takes to win in emerging markets?
Nowadays, when talking about seeking growth, most of the companies will think of emerging markets as a source of huge opportunities for their businesses, given that the prospects for developed markets (US, Europe, and Japan…) are modest, and these countries are still struggling with the economic crisis. Emerging markets have been growing as a share of global GDP, according to the IMF, these markets account for around 40% of global economy by now, and by 2025, the contribution is estimated to be nearly 50%. Besides the economic growth, there are also many other reasons for companies’ expansion into emerging markets such as increasing personal income leading to a huge middle class, much younger population, cheap labor, urbanization… to name a few. The attraction is pretty obvious, but how to get the most out of this inviting cake is the key concern, especially when the competition is becoming more fierce. There are numerous articles and discussions about this topic, apparently there will be no certain strategies or procedures ensuring the success, but the analyses did figured out what in common the winning companies have done when expanding to the emerging markets. Let’s check it out in this post!
Going after the middle market.
The middle class is growing exponentially, especially in Asia, Africa and Latin America. According to Deloitte’s Business Trend 2014 report, there will be 3.2 billion middle class consumers across the planet by 2020. Notably, if your business focus on marketing to consumers, you should pay great attention to the middle class in these emerging markets.
With the reputation and advanced technology in developed markets, some companies tend to focus on the high-end products, overlooking the middle class, and this strategy seems not to work well. This is what happened to Japanese companies when they have suffered weak growth from emerging markets, which is allegedly caused by the “high-end” strategy. Television industry in India can be a good example. While inexpensive but clunky cathode-ray-tube televisions are still dominant in India and accounted for 70% of the sets sold there in 2009, Japan’s electronics companies concentrate on selling more-expensive flat-screen TVs. On the opposite, by targeting the middle and low-end segments, LG, Samsung, and India’s Videocon have captured the market: The two South Korean companies account for 50% of the market (25% each) and Videocon has a 19% share. Meanwhile, the three largest Japanese manufacturers—Sony, Panasonic, and Toshiba— together have only 13%. High-end products may bring in better margin, but the massive middle-class is where companies can recognize the most economies of scale. The extensive presence will increase companies’ bargaining power over retailers and distributors, lowering their sales and marketing costs. And these advantages still persist when they move up to more sophisticated and higher-margin products.
Instead of competing head-on with local competitors, these companies utilize M&A as an effective way to ease their entry and accelerate their performance in emerging market. M&A with local competitors can bring in local market intelligence, broaden the reach by taking advantage of a stronger distribution network, lower operation costs, and provide a local talent pool. Gillette, the world’s largest battery maker from P&G got an amazing return from its acquisition of the Fujian Nanping Nanfu Battery Co. Ltd., the major Chinese rival to its Duracell batteries. Out of the hot Chinese battery brand, this deal also brought Gillette a state-of-the-art low-cost manufacturing plant and a distribution network with over three million retailers throughout China, which enables Gillette to reduce production costs and use the retailing network to extend the reach of its Duracell product line.
Fully committing to emerging markets.
These companies also maximize their investments by building dedicated capabilities in emerging markets. Having formal emerging market organization enables firms to approach the markets with tailored practices that are different from those implemented in their developed markets. Even though Japan is still the largest market for Unicharm, a Japanese personal care products manufacturer, “the company decided to shift the focus of its organization, resources, and strategy if it wanted to gain local insight and succeed. It transferred some of its strongest marketing, R&D, and manufacturing executives to developing countries and appointed one of its top five executives to head its China operations. Unicharm’s overseas sales have grown from ¥68 billion in 2005 to ¥159 billion in 2010, and the share of those sales generated in emerging markets rose from 70% to nearly 90%, according to BCG’s estimates”.
Developing a “good-enough” cost mentality.
Between the traditional premium and low-end market segments lies the the large and flourishing market, which is the massive middle-class market that I mentioned about in the first point. This middle class is usually served by a so-called “good-enough” products, with higher quality than low-end goods but affordable prices that still generate profits. Firms operating in emerging countries need to develop a “good-enough” cost mentality, in which aggressive management of costs is required. Taking advantage of used capital equipment or more labor-intensive production processes, using local suppliers and outsourcing are some techniques that firms can use. For example, a major multinational food company discovered that it could source capital equipment from India at a third of the price it paid to European suppliers without compromising its stringent quality standards.
Cost mentality requires companies to look at everything that they can control to achieve the competitive dynamics in their favor — from changing the specifications for packaging material, to imposing greater operating efficiency, to lowering overhead and using local equipment.
For companies pursuing the “premium end” strategy in their developed markets still can cut cost by a strategic acquisition to make them more competitive. For example, in 2000, Colgate-Palmolive Co. invested $21 million for a 40% stake in Sanxiao, a low-cost toothpaste brand in China. The domestic company had a 30% cost advantage over Colgate. By localizing manufacturing at a Sanxiao facility, Colgate was able to reduce its costs by 60%, which allowed the company to lower the price of its goods by an equal percentage and thus expand into the good-enough segment. Colgate’s benefits even multiplied when it started using the factory as a worldwide distribution center.
So, deciding to expand into emerging market is only the first step, knowing how we can win there is the main focus. To win in the emerging markets, firms need to employ totally different approaches than what they have been using in their developed markets. I hope the points mentioned above would shed some light on those who are planning to enter this huge promising land.