All eyes are on emerging markets to provide profitable future growth. The degree to which your business is able to activate well in emerging markets relies on a robust emerging market strategy.In this article strategy expert Paul Fray examines two key strategic options for rapid expansion success.
Over two thirds of the world’s population are now located in markets that the commercial world has tagged as “emerging and developing” markets. Whilst these markets have comparatively lower GDP, they are experiencing significant growth driven by a more affluent population with growing aspirations.
When you then compare this trend with the growing evidence of limited/ nil growth emerging in what are referred to as “mature developed” markets, it contrasts starkly. One then understands the rapidly growing interests amongst global and regional companies to more meanifully include emerging and developing markets in their growth strategies. This phenomenon applies to most categories, but is being seen most acutely in the FMCG, Consumer Durables, Food Service and Consumer Service industries
A renewed urgency
This phenomenon is not new, it has certainly been a trend amongst the larger globally oriented companies for the last two decades and interestingly enough has actually been equally lead by the global retailing entities as much as the manufacturing companies. However there is now a renewed urgency in this trend for a couple of reasons:
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Firstly those companies with an operating bias towards mature markets has seen decreasing growth through lower consumer spending and escalating costs of NPD and innovation commitment in attempts to stimulate growth against this trend.
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Secondly, the sheer scale of the emerging and developing markets growth in disposable spend and their populations aspirations, combined with a developing presence of sophisticated retailers servicing these markets leads to very searching questions from shareholders when there is not an ‘emerging markets” strategy for growth in their businesses.
Increasingly the larger global manufacturing and retailing entities are aggressively entering these “emerging and developing markets”. They are generally following two models to attain this presence: expansion and acquisition (possibly in a JV form). From a manufacturer’s point of view, both these approaches carry risks and benefits with typically no formal view on what is the most optimal approach:
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The acquisition (or joint venture) route represents a faster entry, does offer immediate critical mass, local presence with culturally aligned organisations. Often though, the two entities find it hard to communicate and cooperate.
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The organic expansion route is a slower burn, typically more cost risky upfront with the local market conditions initially challenging (even in a JV format). It does ensure though, that the new organisation is compatible with the rest of its global operations mitigating local market financial risks and exposure
From the Retailing point of view, both approaches are very evident in these markets and there is no accepted “best practice”. These emerging markets have retailing case studies of acquisitions and organic expansion working successfully in the same company (i.e. Tesco Lotus (JV) and Tesco China organic growth). Similarly there are case studies of established retailers trying both strategies and being less successful (Carrefour).
Now let’s focus specifically on the challenges for manufacturers once they have determined the course of building their presence in emerging and developing markets. The very first challenge is how to develop a financially viable plan that delivers profitable growth within the company’s investment requirements. The financial perspective will be different depending on whether they are following an acquisition or expansion strategy.
Taking the expansion strategy approach first.
Determining which categories and products the company needs to focus on for success is crucial. This will require a robust category & consumer understanding in the target markets. In addition, understanding where shoppers make purchases or could make purchases will determine the type of organisational required to successfully deliver product presence in the appropriate retailing and wholesaling channel environments. Considering the evolving channel formats of internet, social media and financial services, decision making becomes even more complex. Immediately, companies typically realise there is a difficult balance to achieve in spending on ATL activities to build brands, versus the required BTL activities to ensure products are present in all relevant POP/C’s (points of purchase / consumption).
Understanding the relevant POP Universe, selecting target channels and building a product portfolio to launch is only the first step. One then has to consider the options for getting products to market versus the cost to serve of this operation. This is a very complex arena with many pitfalls for an organisation not aware of local trading conditions. This area is often referred to as the “Route to Market ( RTM)”, although this can be a misleading term and is used very differently across companies. Whilst there may be some insight in the decisions your potential competitors have made, often both the category representation and RTM’s of local competitors are unique to market, and competitively protected. Clearly though understanding the choices your competitors have made down the years will give you a unique insight into the category and shopper considerations driving category success. It would be vital to benchmark all your direct competitors before proceeding.
Taking the acquisition strategy approach second
Whilst many of the steps that need to be taken are similar to the expansion approach, one does have the benefit of a local presence against which to benchmark. With this local presence (either through JV or acquisition), you get a snapshot of the market landscape. However a word of caution, it is even more essential in this approach that you benchmark direct competitors to confirm the long term viability of your potential partner / acquisition (ideally before you cement the arrangement).
With the upside of some consumer and shopper knowledge and presence, a sales and marketing organisation on the ground and a RTM presence already in place, this approach now relies on profitably expanding your existing brand & portfolio representation to generate returns on Investment. The principles of category and shopper understanding remain vital, as this informs you of where your organisation needs to be capable of servicing from a RTM perspective. In this situation, the low hanging fruit is typically gained from expanding your distribution base through an approach called
Profitable Expanded Growth
There are some great examples of leading companies having taken this course and built their operational presence in emerging and developing markets, with a wide brand portfolio available globally and with the required NPD and Innovation capability to develop locally equivalent products for these markets. However similarly, many of these companies now realise there is a “local “ element to all these markets with some well established local brands and excellent local operating practices that have delivered local and regional companies great success in these retailing environments.
The emerging market challenge
The single biggest challenge for both these local and GMC’s is to achieve rapid growth to offset the costs associated with driving further distribution. This is where manufacturers can “steal an advantage”. Through the last two decades, there have been many companies active in this area, with some successes and many expensive lessons learned. The principles and learning from these ventures have been consolidated into a best practice approach called
Profitable Expanded Growth. This approach has been manifest in many forms across a range of companies (both large global companies and the equivalent regional success stories), but the principles remain the same. As a result of continual engagement in these markets down the years, this approach has been consolidated by
InDeed Strategy into Action Consultancy into a working programme that removes a large element of the risk in operating in these emerging and developing markets.
Therefore, if you have found the perspectives and opportunities shared in this article stimulating and are keen to pursue development of your profitable presence in emerging and developing markets, I recommend you consider applying the best practice already developed in the approach called Profitable Expanded Growth. We can demonstrate how companies active in this arena and reaping the rewards and growth as a result.
For more information contact:
paulfray@in-deed.com +65 (0) 9326 5527
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The Challenge to Enter and Succeed in Emerging Markets
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