Training for the decathlon
By 2025, annual consumption in the emerging market countries will almost triple, to reach $30tn. In order to win the battle for this magnificent prize, global companies will have to absorb ten key lessons, according to analysts at McKinsey.
Text by: Victor Korolev
The industrial revolution was one of the biggest events in international economic history, although in many ways it pales against the background of a new megatrend, that is evolving before our very eyes: the skyrocketing rise of a new class of consumers in countries of the developing world. According to a major study by McKinsey, the results of which were presented at the end of the summer, by 2025 the annual consumption in the emerging markets will expand to reach $30tn, compared to the 2010 level, of just $12tn. Correspondingly, the share of these markets in aggregate world consumption will jump from 32% to almost 50%. “As a result, emerging-market consumers will become the dominant force in the global economy,” note the McKinsey experts in their report.
Although international corporations claim to understand that emerging markets will play a key role in the long-term success of their enterprises, they continue to frequently complain about the complexities associated with expansion in these regions. “Many of them admit that, despite their advantages of size, more powerful financial capabilities and more advanced marketing strategies, they still need to expend significant effort in order to overcome competition with local, young companies,” considers McKinsey.
Why is this? The main thing is that major international concerns must adapt their approaches to doing business, in order to effectively operate on the emerging markets and, ultimately, so as not to miss out on their share of the colossal opportunities that are appearing in these countries. After an exhaustive analysis of the issue, the experts drew one unambiguous conclusion: to do this, companies need to completely overhaul their working ideology and approaches to doing business, taking into account as much as possible the unique mentalities and peculiarities of life on the local level. There is a parallel here with sports: it is like a decathlon, where ten critical disciplines have been identified, without which multinational concerns cannot hope for victory in the world “championship”, where the main prize is access to the hearts of millions of new consumers, and the trillions of dollars of spending money in their wallets. These, according to the study, are the skills that Western companies must have in order to successfully fight for this tempting prize.
1. Build strategies around the analysis of fast-growing urban clusters, instead of individual cities or even a country as a whole.
Urbanisation in developing countries is currently unfolding on an unprecedented scale. The urban population is today increasing at the rate of approximately 65 million people per annum. In the next 15 years, 440 megalopolises in the developing countries will be producing about one half of the global GDP growth, and 40% of the global consumption growth. A large part of these are small and medium-sized cities.
International corporations continue to frequently complain about the complexities associated with expansion in emrging markets
Unfortunately, the majority of multinational companies are still taking little notice of these trends in their strategic planning to operate in these markets. Despite the huge variety of consumer preferences, levels of purchasing power and market conditions in growing cities, the majority of companies still prefer to depend mostly on the analysis of national factors, sometimes with minor adjustments for the particular conditions of individual megalopolises. This, according to the experts at McKinsey, is a strategic error. “In our opinion, cluster-based strategies are far more effective than attempts to achieve blanket coverage of an entire country or region, or to chase growth in scattered individual cities,” notes the report. Numerous examples of the success of the cluster-based strategy justify such conclusions. For example, concentration upon eight regional clusters in India — instead of 200 separate cities — recently made it possible for one major retail network to halve its overheads in the country.
2. Understanding the peculiarities of local markets and learning to anticipate growth spurts and drops.
To successfully compete on the emerging markets, “market timing”, the skill of finding the right time to penetrate a market and to start different activities on that market, is no less important than geographical positioning. Demand for one or other product or product group, as a rule, undergoes sinusoidal, rather than linear, changes. Such curves include a “warm-up zone” (when the market is still gathering momentum and consumer incomes are growing), a “hot zone” (when consumers have sufficient money to purchase the product) and a “cooling zone” (when demand begins to drop off). “Predicting when and where consumers will move into the hot zone…requires a granular understanding of technological, demographic, cultural, geographic and regulatory trends, as well as a thorough knowledge of local distribution networks” observes the report.
How does this work in practice? As a large part of the population of India is made up of vegetarians, consumption of meat in that country is significantly lower than the world average. In Nigeria, where one third of the residents are children aged less than 14, the sale of baby food and children’s goods is higher than the world average for a population with comparable income. It is clear that knowledge and consideration of such circumstances in marketing strategies offer major advantages—and the converse is also true.
In 2010 the under-35 population in the emerging markets was 63%, compared to 43% in the ‘gold billion’ area
3. Devise high-precision segmentation strategies for maximum local relevance and replication of best practices.
The skill of timing is useful, but not sufficient for success. “Multinational companies must also determine how to refine their product or service offerings so that they will appeal to (or even shape) local tastes, be affordable, and give the company an opportunity to achieve reasonable scale in a timely way”, explain the analysts at McKinsey.
Identifying local tastes demands in-depth study of the consumer market demographics in the target segment, as well as their preferences and behaviours. But time and energy invested in such work are worth the effort. For example, the development of a solid segmenting strategy helped Frito-Lay to win more than 40% of the Indian branded-snack market. In order to achieve such success, the company had to adapt certain of its global products, such as Lays and Cheetos, to the palate of local shoppers. Moreover, Frito-Lay developed Kukure—a snack half-way between traditional Indian street food and western-style potato chips. The result was a product in a totally new category, which is today being successfully sold in other emerging markets—an example of the successful replication of a good idea on a global scale.
4. Rapidly and radically redeploy resources to achieve long-term goals.
In order to successfully compete with lightweight, mobile players on the emerging markets, global heavyweights will have to develop some degree of flexibility and speed: namely, they will have to learn to radically redeploy their resources, rapidly responding to changing market conditions. “Those unable to reallocate…risk a drubbing,” warns McKinsey. So far, the analysis conducted by the agency indicates that the speed of internal resource reallocation and profit growth in companies from the emerging markets are significantly faster than those of the multinational giants, even if both are playing ‘away games’ — operating on the markets of third countries.
According to McKinsey, a no-less significant success factor on the emerging markets is the ability of companies to place major bets (obviously, bets backed by the requisite resources), with an eye on long-term success. After all, as the results of the study suggest, the break-even period for investments is at least 3-5 years.
5. Innovate to deliver value across the price spectrum.
The emerging markets are a virgin field of opportunities for companies to develop, produce and sell goods that reflect the most popular products on the planet, yet adjusted to local conditions. The ability of multinational giants to innovate in this way could bring them significant advantages in the emerging markets.
“Regardless of which products and services a company sells on the developing markets — ‘budget’ goods or goods similar to global offerings — in order to compete successfully, companies will often need innovation and localization, whilst simultaneously adapting both product lines and supply and service chains,” notes McKinsey.
Examples of this are numerous. For instance, the innovative approach to the design of everyday products, taking into account the peculiarities of local demand made it possible for South Korea’s LG Electronics to significantly strengthen its positions in India in the early 1990s. Upon learning that many Indians use television sets to listen to music, LG developed and sold a model with improved sound quality. Moreover, in order to keep prices at a competitive level, traditional cathode-ray tubes were used in these models instead of expensive flat screens. Having won consumer loyalty and a strong market share, LG is now selling the most modern equipment in India, and other manufacturers are following this successful example.
6. Build brands that resonate and inspire trust.
If we compare consumers in developed and developing countries, the difference between them is evident to the naked eye. For example, on average the second group is notably younger than the first (in 2010 the under-35 population in the emerging markets was 63%, compared to 43% in the ‘gold billion’ area) and far more optimistic. Moreover, unlike ‘developed’ shoppers, who tend to preserve ‘life-long’ loyalty to a brand once it has been chosen, their ‘developing’ counterparts are just making their first baby-steps in the world of consumption, and gravitate more toward experimenting with different brands, and they are much more susceptible to the efforts of market researchers. It is necessary to consider all of these factors in the strategic promotion of goods, and branding. “In emerging markets, it is critical for products to be included in the initial consideration sets of consumers — the short list of brands they might purchase,” notes McKinsey.
Local marketing companies capable of promoting the image of your product amongst the local consumers making it easier to generate positive word of mouth are a critical prerequisite for emerging-market success. And, of course, we should not forget that we live in the information age – electronic channels and social networks must also be a part of your marketing arsenal.
Multinational companies must determine how to refine their product or service offerings so that they appeal to local tastes
7. Controlling the road to market.
The McKinsey report underscores the importance in emerging markets of managing how consumers encounter products at the point of sale. In order to verify the validity of such a conclusion, one merely needs to consider that in China approximately 45% of consumers take the decision to buy when inside the store, while in America the figure is 24%. Moreover, almost one quarter of those surveyed during the study admitted, that sales personnel and promoters at points of sale noticeably influence their buying decision.
Nevertheless, learning to manage the behaviour of consumers in stores is an enormous challenge. “Part of the problem is the fragmented nature of the retail landscape in emerging markets; e-commerce penetration currently lags behind Western levels; supermarkets remain a relative novelty, and consumers still make most purchases from ubiquitous mom-and-pop shops,” reports McKinsey. Getting products onto shelves, by navigating the byzantine, multi-tiered network of distributors and wholesalers — a huge job that requires genuine devotion. Therefore, advise the authors of the work, multinational giants should be prepared to build a much larger in-house sales operation in these countries. Moreover, they should spare neither time nor effort to precisely distribute goods by category, to segment points of sale, and to develop and integrate procedures and checks to monitor the quality of customer service in stores.
Each year 30–40% of top managers employed in Chinese divisions of international concerns change jobs
8. Fostering efficient structures for the markets of tomorrow.
In theory, global players on emerging markets must have strong advantages over local competitors. In part, they can boast global infrastructure and geographical diversification, allowing a reduction of country risks. However, this is often not the case in practice. Another conclusion of the McKinsey report speaks to this issue: the faster the business of a global company grows and diversifies in these countries, the faster the costs of managing such a structure increase. This, in turn, prevents corporations from effectively identifying and responding to the demands of local consumers. Moreover, the need to meet Western standards for doing business and managing risks often prevents firms from acting fast enough to seize opportunities as the markets generate them.
Internationals can reduce the size of this “globalisation penalty” by optimising processes and organisational structures “on the ground.” Moreover, it is of critical importance to determine the role of the corporate centre. “Too often, headquarters assume functions that add complexity but little value,” notes McKinsey, suggesting that managers commit to memory one universal truth: the farther flung the organisation, the greater the virtue of simplicity.
9. Turbocharge the drive for emerging-market talent.
If the emerging markets have no deficit of cheap manual labour, qualified managers are an extremely rare commodity. For example, in China today there are barely two million local managers who possess management skills and English language competence at a level that can satisfy international companies. And the headhunt is on. It is no coincidence that each year 30-40% of top managers employed in Chinese divisions of international concerns change jobs — about five times more than the world average. Furthermore, these “star” managers prefer to work in Chinese corporations, where they can expect a bigger wage and fast career track.
In an attempt to take the edge off the acute manager deficit, some international corporations have recently boosted the wage levels of their most valued employees. Yet, this is not enough to solve the problem. “In emerging markets, global firms must develop clear talent value propositions —an employer brand,” advises McKinsey.
This can be achieved in all kinds of different ways, from improving working hours and creating corporate child care, to offering additional professional development opportunities and prospects for promotion in the global company’s hierarchy. All of this requires detailed planning that integrates both specific goals and long-term processes for staff training and recruitment.
10. Lock in the support of key stakeholders.
Wherever a successful company operates, it needs to secure support for its activity among key stakeholders in the government, civil society, and the local media. Effective management of these channels can greatly ease a corporation’s market entry, the opportunity to acquire assets, and also improve the firm’s reputation, in the broadest possible sense.
In emerging markets, notes McKinsey, global companies need to invest far more time and energy into constructing these channels and relationships, than they have done in their home countries. This includes cultivating relationships with local business groups: consumers, partners of joint ventures, investors and suppliers. “Such recommendations may sound like common sense, yet it is surprising how few multinationals take them seriously,” comments the report. And, of course, one should not forget about relations with one’s own shareholders. “They must be persuaded that the pursuit of long-term growth in emerging markets is worth short-term reductions in returns on capital and won’t necessarily weaken performance in core markets,” is McKinsey’s parting advice.