Alternative Strategies For Emerging Markets

By M. Isi Eromosele

With markets in the developed world saturated, multinational corporations have increasingly turned to emerging markets in the developing world to seek business investment opportunities.

Such emerging market strategies had been targeted almost exclusively at the wealthy elite near the top of the economic pyramid. Recently, however, a number of multinational corporations have launched new investment initiatives that explore the untapped market potential at the base of the emerging market economic pyramid, the largest and fastest-growing segment of the world’s population.

Reaching the four billion people in these markets poses both tremendous opportunities and unique challenges to potential investor companies.  This is because conventional wisdom about how to use their global capabilities and subsidiary strategy in emerging markets may not be appropriate.

An Oseme Consulting analysis suggest that the success of initiatives targeting low-income emerging markets will be enhanced by recognizing that Western-style patterns of economic development may not be the right model in these business environments.

Low-income markets in emerging economies present both tremendous opportunities and unique challenges for multinationals. The four billion customers in these emerging markets represent a vast potential of untapped market opportunities.

In spite of apparent challenges, however, a growing number of multinationals are now beginning to recognize and explore the enormous business opportunities at the outer reaches of the emerging market economic pyramid. Firms such as Unilever and Hewlett-Packard, for example, have made public commitments to generate a sizeable portion of their revenues from these markets.

Entry Strategies Into Emerging Markets

Entering low-income markets in emerging economies require a different strategic approach. Reaching these markets involves bridging the formal and informal economies. In the informal economy, relationships are grounded primarily on social, not legal contracts and the organizations with the most expertise in serving these markets, government and civil society have a strong social orientation.

Successfully operating in this business environment requires a capability to understand and appreciate the benefits of the existing social infrastructure. Indeed, organizations that value and leverage existing social capital have achieved success in these markets. Many of the most successful micro-loan programs targeting the poor, for instance, rely on group lending and peer pressure to ensure payback.

If one person in the group defaults, no one else in that group is eligible for a future loan. When used in low-income markets in the developing world, this novel design has created payback rates that even banks in the developed world would envy. However, when transferred to the inner city in the US, this model has been a failure, illustrating that unique social institutions operate in the informal economy in developing countries.

Divergent Emerging Market Strategies

Multinationals accustomed to creating competitive advantage through patents, brands, and contracts are wary of entering markets where their proprietary technology and knowledge cannot be protected through enforceable legal mechanisms.

To address this uncertainty, multinationals entering emerging markets look for ways to overcome limitations in the business environment. Firms design boundaries to protect internal resources and capabilities from unintended spillover and look for partner organizations that wield substantial capability to fill voids in the business environment.

This perspective assumes that over time the local business environment will evolve into an economic setting that is familiar to Western managers: legal contracts will supersede social ones and competitive advantage will be grounded in the ability to protect resources and knowledge from unintended leakage outside firm boundaries.

The overwhelming majority of multinationals tend to ignore within-country differences in business environments in the emerging markets and implicitly assume that capabilities developed at the top of the pyramid will be viable across all prospective markets.

Instead, firms can address gaps in the business environment through forming alliances, joining networks, using interpersonal ties or managing firm boundaries. International marketers have to recognize that there is the need to consider both global efficiencies and local adaptation in segmenting local consumer markets.

The challenge for these companies is to find global similarities that can be leveraged across multiple countries while adapting to local differences as needed. Two interesting approaches to this business model can be implemented. One is to cluster countries along similar dimensions, with firms being encouraged to concentrate on one cluster, or subset of countries at a time. A second strategy is to look for global segments that transcend national and cultural boundaries.

In sum, emerging economies should not be viewed as following a homogeneous pattern of economic development in which all markets are evolving toward a more Western-style business environment.

M. Isi Eromosele is the President | Chief Executive Officer | Executive Creative Director of Oseme Group - Oseme Creative | Oseme Consulting | Oseme Finance

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