Emerging Markets: Wellspring of Opportunities or Overhyped Mirage?

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It’s tempting for executives in charge of strategic planning at western multinationals to look to entry and expansion in emerging markets as a magic pill for boosting sales volume and meeting growth targets. China, with its enormous population, rapidly growing middle class, high GDP, and government-engineered transformation to a consumption-focussed economic growth model, is usually at the top of their target market list, which includes others such as India, Russia, Brazil, and Thailand. But if you add in their volatility, and in some cases lack of free market operations and poor regulatory and governance environment, it’s clear that emerging markets are both a blessing and a curse for outside investors and market entrants.

CEIBS Parkland Chair Professor of Strategy Seung Ho Park has long been exploring the business environments of these markets, and the factors that have influenced the successes and failures of foreign entrants. In his latest paper titled “Blind Spots in Global Strategy: Applications in Emerging Markets” he and his co-authors explore the trends they have found in their prior research that show there are four blind spots common to companies operating in emerging markets which can hamper their results. They are:

 

  • Scaling up

  • Localization

  • Reading the tea leaves (understanding benefits of the government’s Invisible Hand)

  • Favouring disruption over transformation

Based on their extensive findings, Prof. Park and his co-author Gerardo Ungson, Y.F. Chang Chair Professor in International Business, San Francisco State University, suggest ways in which companies can be more effective in avoiding these blind spots.

Scaling up is the principal strategy for companies to achieve growth and market share. Achieving large scale can decrease costs through achieving economies of scale and scope. Growth through scaling affords opportunities to average out high fixed costs, and when successfully applied, it yields above-average profit margins.  However in their studies Prof. Park and his co-authors found that the mind sets of emerging market consumers are still evolving, therefore applying the same mass merchandising strategy used in developed markets is difficult. The more nuanced preferences that consumers have also make it difficult to increase manufacturing output to an efficient/profitable level.

Localization in the context of globalization means that a few features of a product or service are adapted to meet the demands and preferences of a given local market or segment. It is assumed that these changes won’t significantly change the cost structure of the product. Professor Park and his co-authors found companies that were successful in localizing had several practices in common.  They were proactive in becoming more aware of deep local preferences, and they used an assortment of multi-brand and product extensions to provide a wide array of choices to idiosyncratic middle-class consumers. They also realized that consumers in emerging markets expect multinationals to deliver not only extensive product/service adaptation, but also deliver a higher level of good behaviour, including in their human resources policies and practices. Companies that were proactive in training local employees, had a higher level of decentralization by putting more trust in local managers, and participated in local community activities, were generally more successful in localization.

Reading the tea leaves — ie recognizing benefits from the government’s invisible hand and anticipating and leveraging government policies — is something that local companies are generally better at doing than multinationals, according to Prof. Park’s findings. Multinationals often mull over whether or not governments should interfere in the private sector. However, given the state of economic underdevelopment and the imperative of catch up dynamics, emerging market governments play a decisive role. Their studies show successful local companies saw government involvement as an opportunity, not a hindrance. Multinationals need more thoughtful approaches in nurturing government relations.

Finally, Prof. Park’s research has also explored the differences between disruption and transformation when companies look to leverage niche market opportunities in emerging markets. Disruption occurs when a new product or business model takes over the turf of established players, however while exploiting new opportunities in niche markets may be transformative, it isn’t always disruptive. Unlike disruptive events that impel sudden and significant junctures, transformations can take on a slowly evolving character. Not all niche markets will be profitable, and not all enterprises will have the right strategy to make them profitable. Multinationals and large local companies usually try to mitigate the risks by waiting until enough smaller local players jump into a niche before they enter. Smaller players may be more adept at recognizing the niche market potential and bearing the risks of being an early mover. However, multinationals often miss that these local champions do not necessarily see themselves as disruptors. For them, it is just a transformative process of filling in an unfilled or neglected market segment that can become more viable and accessible over time, and the local champions nurture this segment through incremental market inclusion.

In knitting together the findings from their various streams of research on emerging markets, Professor Park and his co-author suggest that firms looking to enter an emerging market stop placing so much faith in macroeconomic growth data and instead drill down to the fine-grained elements of growth to determine whether the market has consolidated enough to warrant a high mass consumption strategy focussed on leveraging the benefits of mass production. The rules of the game in emerging markets are constantly in flux and evolving over time. Therefore, the researchers suggest firms should also keep a reflexive mind set and take into account the differences and nuances in cultures and how they are important in practice. 

The paper has been published in the journal Cross Cultural & Strategic Management; read the paper here. The primary studies on emerging markets used in this paper are:

Rough Diamonds: The Four Traits of Successful Breakout Firms in BRIC Countries by Seung Ho Park, Nan Zhou & Gerardo R. Ungson;

Scaling the Tail: Managing Profitable Growth in Emerging Markets by Seung Ho Park, Gerardo R. Ungson & Andrew Cosgrove;

Emerging Market Multinationals: Solving Internationalization Challenges by Alvarro Cuervo-Cazurra, William Newburry & Seung Ho Park;

ASEAN Champions: Stalwarts of Regional Integration by Seung Ho Park, Gerardo R. Ungson & Jamil Paolo Francisco.

Image courtesy of imagerymajestic at FreeDigitalPhotos.net

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