A lot has been written over the years about the benefits of doing business in emerging markets. As markets mature and multinational firms run out of room to grow in the developed world, most MNC’s have in a period of more that two decades, turned their attention to South America, Eastern Europe, China, India and Africa. Most MNC’s are drawn to emerging markets by two factors; firstly the possibility to reduce costs mainly because of low input costs found in emerging markets such as land, labor and materials and in some case benign tax regimes and other incentives.
The second big ocean current, that in my opinion, drives MNC’s to seek out emerging markets, is potential market sizes presented by individual countries and regions that make up the “emerging market mass.” The numbers are indeed staggering. Take population sizes as an example; 1.25 billion people in India, 1.35 billion in China, 1.1 billion in Africa, 250 million in Indonesia, 200 million in Brazil etc., For a detailed projection of potential population sizes by 2050, see Stephanie Garelli, Top Class Competitors, page 15 – 19. Whilst for some, the sheer absolute population sizes is enough, for others however, especially players in healthcare, packaged goods, etc., the size of the”consuming class” is by far the biggest lure. For some additional perspective on this, see Walmart’s acquisition of South Africa’s Massmart and Deloitte on Africa; The Rise and Rise of Africa’s Middle Class.
In most boardrooms in key centers of the world, the discussion is no longer about whether to enter an emerging market or not, but about how, most specifically about how to win in emerging markets. With this shift, one can also see a shift in curricula of MBA’s and executive programs as well the increasing number of emerging market practices in consulting firms. One also sees this trend reflected in the volume and content of business schools’ emerging markets site visits as well as the nature of the literature that is doing the rounds in academic and practitioner spheres. For additional perspective on this, see IE/Brown Executive MBA curriculum and the Cape Town site visit, Harvard Business Review articles (Thriving in Emerging Markets, Troubles Ahead in Emerging Markets) and books (Khanna & Palepu, Winning in Emerging Markets). Of course, I know I can also count on my sparring partner, Jerome Vetillard, to chip in with his experiences on “Sanitation in Cape Town Townships.”
The shift in focus may well be reflection of how difficult it is to enter and generate shareholder value in emerging markets with our current strategic and managerial logic, strategy and business models that may have served us well in our home countries, but that may be insufficient or irrelevant in some of the emerging markets, purely because the “distance; cultural, administrative, geographic and economic” between home markets and emerging markets is so vast. For a detailed discussion on the topic, see Pankaj Ghemawat; Distance Still Matters, HBR, September 2001. It could also be a reflection of the “institutional voids” in emerging markets (Khanna & Palepu, Winning in Emerging Markets).
Regardless however, what is undeniable, is that MNC’s need to employ innovative and high impact strategies to win in emerging markets. In the first mile, the MNC needs to enter the market and gain a foothold of the market quickly and without burning too much cash in order build confidence, credibility and support from the firm’s headquarters so the parent company can see some early results and continue investing. The MNC faces two sets of issues in this regard. Firstly, issues in the non market space relating to obtaining permits and in some cases, building trust and obtaining the social license to trade and creating an overall good feeling about the company amongst gate-keepers, “influencers and legitimizers.” For a detailed discussion on permits etc., see World Bank’s Ease of Doing Business Reports.
Without this, the MNC generally battles to secure good talent that is so much in short supply, good quality and reliable suppliers and go to market partners. Secondly, the key issue that MNC’s face, is securing customers to launch the business. Generally, this is not a big battle for MNC’s especially in FMCG, since their launch customers are generally “global citizens” in emerging markets who pretty much have the same outlook, consumption habits and practices as their home based customers. The good thing about this, is that MNC’s, especially in FMCG can ship products from their home markets, modify packaging to comply with regulatory requirements and sell in an emerging market. The big issues at this phase that MNC’s face are; firstly, due to import duties and in some cases unreliable transport and logistics infrastructure, MNC’s are then forced to increase prices to improve the economics of their merchandise, thus reducing the number of global citizen consumers who see value in what is on offer and can afford. Secondly, at times MNC’s suddenly discover that the size of the global citizen consumer market is much less than what off shelf research reports estimated.
In the “mid mile” phase, assuming that the MNC managed to navigate the market entry challenges referred to above, it now needs to grow sales volumes to spread its fixed costs over a substantially larger base of unit sales, especially since in some cases, unit prices may lower than normal on PPP point of view. To achieve this, MNC’s generally need to go where the action is. In other words, they need to take their brand to low income market segments which are vastly different from the global citizen consumer. This is a major challenge for most MNC’s since they have to change the business model for them to have slim chance of winning. This is where the “in market team” begin to butt heads with the headquarters. In some cases, because of the different usage circumstances that prevail, the product that performed so well in its home market, at times may not live up to its promise without some formula upgrade which invariably increases the cost of goods sold.
An additional challenge in this phase, is navigating the go to market challenges to reach slightly lower income groups outside or on the periphery of the main centers. This is a big challenge that I plan to delve into in subsequent posts, but one of the big challenges is finding reliable suppliers and navigating the infrastructural and logistical constraints in order to reach a fragmented consumer base through fragmented retailers spread over a wider area, the majority of whom do not have have sufficient cash to buy enough, and as a result by small lots. For those with the means, storage and shelving space may be a challenge.
The underlying causes of most the issues discussed above, that give rise to first, mid and last mile challenges can be attributed to non existent or immature rules of engagement that structure and facilitate buying and selling (see Douglas North as well as Khanna & Palepu). Over and above institutions, volatility of financial and real markets induced by political business cycles is well documented. Javier Santiso has written extensively about impact of political business cycles on financial markets, but in real markets, political business cycles at times, lead to reviews of the same regulatory regimes that gave the MNC, the legal license to trade in the first place, thus making the environment uncertain and unpredictable and difficult to plan around. A lot has been written about how to navigate VUCA conditions, but this is a subject for another day.
The are many factors that can lead to winning the first, mid and last mile in emerging markets, but the factor that I want to start with, that probably is not receiving as much airtime and share of “voice” as others, is the non market strategy, especially the integration with the “market strategy.” I am sure it is clearly evident how intertwined the market and non market challenges across all the miles, first, mid and last mile are and that this topic requires increased emphasis. In short, MNC’s need to have a non market strategy that is integrated with market strategy, to either shape the rules of the game in its favor or to create a position of advantage or to complement and amplify its market position in order to increase the present value of difference between the cash that the firm uses up in order to deliver value to consumers and what it gets for delivering that value.
For a detailed discussion of non market strategy see David P. Barron, California Management Review Reprint Series, 1995 and David Bach & David Bruce Allen; What Every Ceo Needs to Know About Non Market Strategy, MIT Sloan Management Review, Spring 2010. In a nutshell however, non-market strategy refers to the set of actions outside the market arena that a firm may take to either shape the rules of the game in its favour or to create a position of advantage for its products and services or to complement and amplify its market strategy.
NB: This article first appeared on LinkedIn.
Notes About the Author: Kheepe Lawrence Moremi
Seasoned strategy & market facing professional with strong business acumen, operating experience and entrepreneurial flair. Former founder board member of the Marketing Association of South Africa, former founder marketing director of Brand South Africa, executive lead of customer strategy at Deloitte Digital, Advisor to the Board Chair of Eskom, head of strategy, innovation and marketing at FNB (a division of First Rand Bank), marketing manager at Nedbank, brand manager at African Bank and Procter & Gamble.
- Beta Gamma Sigma Lifetime member,
- Executive MBA From Brown & IE Business School
- Strategy & Innovation from Oxford