Co-Inventing Custom Solutions In Emerging Market Ventures

By M. Isi Eromosele

In pursuing low-income markets in developing countries, multinational firms must adjust to an environment where social, not legal, contracts dominate, and where accurate knowledge about potential consumers is not readily available.

Assessing context-specific information require a more participatory approach in which all parties need to be willing to share information. This extends far beyond the idea of ‘national responsiveness’ (adapting pre-existing solutions to local conditions), which pervades the present mindset on global strategy.

An Oseme Consulting analysis indicated that entry into low-income emerging markets indeed benefited from identifying local partners who could actively contribute to venture conceptualization by adding local content to the product design.

Entrepreneurship by local distributors was encouraged by providing flexibility in how the final product or service could be marketed or delivered. The goal would be the building of infinite flexibility into the product and therefore, selection of third-party partners.

In contrast, unsuccessful initiatives by multinationals tended to rely on controlling the adaptation of existing products and, focusing on the weaknesses in the environment, they also made substantial efforts to protect property rights, including preventing user or distributor modification.

Furthermore, in successful ventures, the emphasis should be on maximizing the functionality of the product offering. This would include having the product and business model development co-evolve. Partner organizations would co-design the entry strategy, including the delivery of the product or service.  

Poorly performing ventures tend to view the value proposition in terms of the product itself and often completed the development process at a centralized and geographically distant location (for example, at corporate R&D centers) prior to designing the business model.

One successful emerging market placed venture, for instance, decided to forgo adopting the traditional pricing model of cost plus margin. Rather, in discussions with local partners, they identified the appropriate selling price first. By ‘reverse engineering’ and ‘maximizing local knowledge and entrepreneurship’, they then jointly designed a product and business model that provided the functionality required and offered profit margins that were acceptable for a high-volume business.

In other example, a locally based multinational was unable to enter emerging markets effectively, primarily because its entry strategy was based on making an incremental adaptation to a current product. By removing some of the existing functionality, it was able to create a lower-cost version of one of its mainstream products. Selling this less

expensive version through its traditional distributors did allow the firm to capture some additional price-sensitive customers.

However, the multinational was not successful in reaching the vast majority of low-income customers. This low-income market would have been much better served if the company had co-designed the product from the bottom up (as opposed to the top down) with local partners who understood what set of functionalities were most important to base-of-the-pyramid customers.

Sharing Resources To Develop Local Capacity

The transnational model, the predominant view of global strategy, should focus on global integration, national responsiveness and worldwide collaboration. This perspective

emphasizes sharing resources internally and maximizing the economic benefits to the firm.

An Oseme Consulting analysis suggests that firms interested in targeting low income emerging markets must also consider both societal performance and the sharing of resources outside firm boundaries, local capacity building, to be successful.

One important way in which successful ventures can address the need to consider societal performance is by incorporating local capacity building directly in their business models (rather than through the more conventional approach of corporate philanthropy as an activity separate from the business). For example, several successful initiatives have included training programs for local entrepreneurs.

Others identified mutually beneficial opportunities that built the capacity of existing institutions, such as micro-lending organizations or filled in gaps in local infrastructure through provision of basic services to population segments.

The financial investment in local capacity does not necessarily have to be large to create substantial benefits. For example, strategic bridging offers a different and potentially useful way of flexibly adjusting the level of collaboration.

Similar to the entrepreneur filling a structural hole, a multinational can become an unofficial strategic bridge between existing organizations that are having difficulty cooperating with each other. By becoming a strategic bridge, the multinational becomes a conduit that can enhance the flow of information, capabilities and financial resources between these organizations.

The transnational model identifies global efficiency (leveraging knowledge and resources), national responsiveness (modifying knowledge and resources) and worldwide learning (sharing knowledge and resources) as the crucial capabilities for multinational firms to be successful in emerging markets.

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

Copyright Control © 2012 Oseme Group

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

Copyright Control © 2012 Oseme Group