Last March, Pedro Videla, an economics professor at the IESE Business School at the University of Navarra, told an audience in Madrid, “The 21st-century is going to be one of huge changes. Over the next few years we will see an immense transformation of the world economy, with an impact similar to that which occurred during the first Industrial Revolution.” [“The World is Undergoing a Fundamental Change,” IESE Business School News, 14 March 2013] If current trends continue, he notes, “In 2050 Asia will generate 50% of the world’s GDP while Western Europe will only produce 7%.” Companies that want to survive and thrive in the decades ahead are going to have to figure out a way to compete in in areas where growth is predicted. According to Videla, “The new axes of world economic growth are Asia, Africa and Latin America. … This suggests a convergence in the world economy that we’ve never seen before.”
In Part 1 of this series, I quoted Steve Varley, Ernst & Young UK & Ireland Chairman and Managing Partner, who stated, “Globalisation continues to define our business landscape.” [“BRICs face competition as globalisation creates new emerging players,” by Jonathan Marciano, Ernst & Young, 21 January 2013] If Videla and Varley are correct, and I believe they are, then companies are going to have to adapt to this new business landscape. They will need to understand the cultures, tastes, and preferences of millions of new consumers who are predicted to emerge from poverty’s grasp and join the ranks of the global middle class. Varley explains: “Leading companies are adopting a multi-market approach. While the BRICs remain critical to their strategy, executives are also looking closely at opportunities in non-BRIC emerging markets, where they are seeing improvements in the ease of doing business, infrastructure, government policies and labour productivity. They’re also discovering that a standard strategy for a group of markets — e.g., an ’emerging markets’ strategy — no longer works. Instead, what they will need are nuanced and customized strategies for different markets, areas, regions, sectors and countries.”
The truth of the matter is that companies are NOT looking for areas, regions, sectors, or countries. They are looking for consumers; and, the largest number of new consumers is found in emerging markets. The Economist notes, “Nearly 1 billion people have been taken out of extreme poverty in 20 years. … The world’s achievement in the field of poverty reduction is, by almost any measure, impressive. … Most of the credit, however, must go to capitalism and free trade, for they enable economies to grow—and it was growth, principally, that has eased destitution.” [“Towards the end of poverty,” 1 June 2013]
Professor Videla agrees with that assessment. “Countries don’t compete,” he states, “they become more commercial. When countries interact they generate wealth.” How much wealth? In the first segment of this series, I quoted McKinsey & Company analysts Yuval Atsmon, Peter Child, Richard Dobbs, and Laxman Narasimhan, who assert, “By 2025, annual consumption in emerging markets will reach $30 trillion—the biggest growth opportunity in the history of capitalism.” [“Winning the $30 trillion decathlon: Going for gold in emerging markets,” McKinsey & Company, August 2012] That is a flow of revenue into which companies want to be emerged. The authors continue, “Leading the way is a generation of consumers, in their 20s and early 30s, who are confident their incomes will rise, have high aspirations, and are willing to spend to realize them. These new consumers have come of age in the digital era. Already, more than half of all global Internet users are in emerging markets.” Most of these digital natives won’t access the Internet via computers; rather, they will use mobile devices like smartphones. The authors report, “A recent McKinsey survey of urban African consumers in 15 cities in ten different countries found that almost 60 percent owned Internet-capable phones or smartphones. As e-commerce and mobile-payment systems spread to even the most remote hamlets, emerging consumers are shaping, not just participating in, the digital revolution and leapfrogging developed-market norms.”
Atsmon, Child, Dobbs, and Narasimhan believe that for companies to win their piece of the predicted $30 trillion pot of gold, they “must master ten key disciplines.” According the authors, these ten disciplines “can be grouped into three types of activities:
- “Throwing accurately. Companies must aim their emerging-market activities at the right opportunities. That involves surgically targeting urban growth clusters, anticipating moments of explosive growth, and carefully balancing local relevance and global scale. The digitization of the emerging world is generating increasingly rich data sources that can guide such efforts.
- “Jumping in. As multinationals leap into action in the emerging world, they face the potential for big gains or losses. The next four capabilities reflect these moments of truth: aggressively redeploying resources to seize nascent opportunities, creating product portfolios, crafting brands, and building a go-to-market system that delivers what emerging-market consumers need, where they want it. Success in these markets demands cutting-edge technology and aggressive investment in processes tailored to local conditions.
- “Running the distance. The final three capabilities underscore the fact that competing effectively in emerging markets is a long-term challenge. Global organizations must rethink structures and management processes to move nimbly in unfamiliar environments while retaining scale advantages. They must fashion new models to attract, retain, and develop scarce emerging-market talent and forge new relationships with stakeholders to build sustainable businesses.”
One thread that runs through all of these activities (especially those found in the first two groups) is big data analytics. This becomes more apparent in the authors’ discussion of the individual capabilities beginning with targeting urban areas.
1. Surgically target urban growth clusters.
“The scale of the modern exodus from farms to cities has no precedent. In emerging-market economies today, the population of cities grows by 65 million people a year—the equivalent of seven cities the size of Chicago. Over the next 15 years, just 440 emerging-market cities will generate nearly half of global GDP growth and 40 percent of global consumption growth. Most of those are midsize cities. … These ‘middleweights,’ as opposed to tier-one megacities, frequently offer the best opportunities. … [However, failing to recognize] the diversity of consumer preferences, purchasing power, and market conditions in emerging societies, … is a fundamental strategic error. China has 56 different ethnic groups, who speak 292 distinct languages; India embraces about 20 official languages, hundreds of dialects, and four major religious traditions; Brazil’s citizens are among the world’s most ethnically and culturally diverse; the residents of Africa’s 53 countries speak an estimated 2,000 different languages and dialects. Even geographically proximate tier-one cities can be radically different. Consider Guangzhou and Shenzhen, two southern Chinese metropolitan centers of comparable size, separated by a distance of just 100 kilometers. In the former, the majority of consumers are locally born Cantonese speakers. In the latter, more than 80 percent are migrants who communicate in Mandarin and, reflecting their disparate regional origins, have far more diverse tastes in consumer electronics, fashion, and food.”
The only way to get a handle on the complexity noted above is by embracing big data analytics. Even within cities, there can be differences in neighborhood lifestyles, preferences, and tastes. If consumers in those unique locations are to be reached, targeted marketing is essential and that can only be achieved through the use of big data analytics. As Atsmon, Child, Dobbs, and Narasimhan conclude, “For all but a handful of high-end product and service categories, the emphasis should be on ‘going deep’ before ‘going wide’.”
2. Anticipate moments of explosive growth.
“In emerging markets, timing matters as much as geography in choosing where to compete. Demand for a particular product or category of products typically follows an S-curve rather than a straight line: there is a ‘warm-up zone’ as growth gathers steam and consumer incomes begin to rise, a ‘hot zone’ where consumers have enough money to buy a product, and a ‘chill-out zone’ in which demand eases.”
Clearly, big data analytics plays a crucial role in providing insight into which zone is located in which geographic location.
3. Devise segmentation strategies for local relevance and global scale.
“Identifying high-growth hot spots and anticipating when consumers there will be ready to buy isn’t enough. Multinationals also must determine how to refine their product or service offerings so that they will appeal to (or even shape) local tastes, be affordable, and give the company an opportunity to achieve reasonable scale in a timely way.
Deciding how and how much to cater to local preferences requires a deep understanding of consumer demographics, preferences, and behavior within target segments.”
In other words, companies need to get much better at implementing targeted marketing. It has been estimated that less than 10 percent of today’s marketing is targeted. That simply won’t be good enough to capture consumers in emerging markets.
4. Radically redeploy resources for the long term.
“To win in emerging markets, developed-market companies must be willing to embrace big changes fast; those unable to reallocate resources radically risk a drubbing by local competitors. Our research shows that emerging-market companies redeploy investment across business units at much higher rates than companies domiciled in developed markets. Emerging-market firms are growing faster than their developed-market counterparts, even when both operate in neutral third markets where neither is based. The emerging players’ growth advantage persists even after controlling for the smaller base from which they start, and it also exists in developed markets.”
Analysts have warned companies for some time that the clock speed of business is going to get faster. Planning can longer take place on a quarterly basis if companies want to be agile enough to compete in today’s changing landscape. The business world is moving ever closer to a real-time business model.
5. Innovate to deliver value across the price spectrum.
“Emerging markets offer greenfield opportunities to design and build products and services with innovative twists on best-in-class equivalents in established markets. … The number of multinational firms with major research centers in China has risen to nearly 1,000, from less than 20.
Local players too are proving nimble innovators. …
Whether a company sells basic products or services to challenge low-cost local players or seeks to entice consumers to adopt new products and services comparable to global offerings, competing effectively often requires innovating and localizing, while redesigning product lines, service operations, and supply chains.”
One innovation process that continues to gain steam is called “Jugaad” (pronounced jewgard), an Indian term used to describe a unique innovation process. Literally, “jugaad” means “somehow get it done.” That’s not a bad mantra for companies wanting to capture marketshare in emerging markets.
6. Build brands that resonate and inspire trust.
“The outlook of consumers in emerging markets differs from those in developed ones in many ways. On average, emerging consumers are younger—with 63 percent aged 35 or under in 2010, versus 43 percent in developed countries—and more optimistic than their more affluent counterparts. And unlike developed-market consumers, whose purchases are informed by a lifetime of exposure to products and brands, emerging consumers are novice shoppers for whom buying a car, a television, or even a box of diapers may be a first-time experience. …
These characteristics have significant implications for brand and marketing strategies. In emerging markets, it is critical for products to be included in the initial consideration sets of consumers—the short list of brands they might purchase. …
Building trust … requires careful scrutiny of brand messages and delivery.”
Companies need to be sensitive to the fact that many new consumers will have long memories concerning past abuses by foreigners and foreign companies. As a result, building trust could take time.
7. Control the route to market.
“Our research underscores the importance in emerging markets of managing how consumers encounter products at the point of sale. In China, 45 percent of consumers make purchasing decisions inside shops, compared with just 24 percent in the United States. …
Managing the consumer’s in-store experience is an enormous challenge, especially in middleweight cities where the biggest growth opportunities lie. Part of the problem is the fragmented nature of the retail landscape in emerging markets; e-commerce penetration currently lags behind Western levels, supermarkets remain a relative novelty, and consumers still make most purchases from ubiquitous mom-and-pop shops.”
Decisions like size, packaging, and resupply intervals will be critical. Logistics will also require some out-of-the-box thinking since many brownfield urban areas are infamous for their narrow crowded streets. That makes the “last mile” challenge a significant one.
8. Organize today for the markets of tomorrow.
“In theory, global players should enjoy substantial advantages over local rivals in emerging markets, including shared infrastructure and the protection that a more geographically diverse business portfolio offers against country and currency risks. In practice, however, we found that as global companies grow bigger and more diverse, the costs of coping with complexity rise sharply. … Furthermore, the need to adhere to globally standard policies and risk-management practices sometimes hinders managers of global companies in emerging markets from moving quickly to lock in early opportunities.”
The authors recommend moving essential functions into the regions they support. Just as many companies are finding that extended supply chains expose them to new risks, extended lines of communication also can makes things more difficult.
9. Turbocharge the drive for emerging-market talent.
“Unskilled workers may be plentiful in emerging societies, but skilled managers are scarce and hard to retain. In China, barely two million local managers have the managerial and English-language capabilities multinationals need. … Increasingly, local stars prefer working for local employers that can offer them more senior roles. … In emerging markets, global firms must develop clear talent value propositions — an employer brand, if you will — to differentiate themselves from local competitors. …
Deepening ties between key corporate functions and emerging markets can create opportunities for local talent while enhancing organizational effectiveness. … Given the leadership requirements of emerging markets, global companies need bold talent-development targets.”
The managerial talent problem will diminish gradually as emerging markets gain more experience. But, for now, the problem is significant.
10. Lock in the support of key stakeholders.
“No matter where successful businesses operate, they need the support of key stakeholders in government, civil society, and the local media (increasingly shaped by online commentators). Managing these relationships effectively can have a huge impact on a company’s market access, ability to engage in merger or acquisition activity, and broader reputation. We believe global companies must devote far more time and effort to building such support in emerging markets than they would in developed ones.”
Unfortunately, in many emerging markets corruption remains a serious problem. That makes gaining the support of local government and business stakeholders problematic. Nevertheless, Atsmon, Child, Dobbs, and Narasimhan conclude, “The rise of the emerging world’s new consumer class is the greatest competition of our age for businesses—one no truly global company can ignore.” I agree completely.