The Right Entry Point for Emerging Markets
I recently participated in a spirited panel discussion with Bruce Brown, Procter & Gamble's Chief Technology Officer, and Erich Joachimsthaler, Vivaldi Partners' managing director and CEO. The topic — part of a series on innovation sponsored by Singapore's Economic Development Board and coordinated by Harvard Business Review — was "What's the Right Entry Point for Emerging Markets: Target Customers at the Bottom or the Middle of the Pyramid?"
I kicked off the discussion by arguing that many companies ought to start in the middle. After all, the World Bank estimates that the number of middle class consumers in emerging markets will jump from 420 million today to more than 1.2 billion by 2030. In Asia alone, spending in that market tier will surge during that time period from $5 trillion to $30 trillion.
Reaching this vast middle won't be easy, I said. First, it will take more than introducing compelling products and services to mastering intricate business models. Success can require experimenting with new ways to market, distribute, offer post-sales support, and more. You also need to re-think how you organize. Global giants have to increasingly ask emerging markets branches to go from acting as local distributors to serving as local developers. This shift is easier said than done. It requires rethinking reporting relationships, talent management, rotational assignments, compensation, and more.
Joachimsthaler's perspective was that while the numbers sounded enticing, the middle class is no monolith. Companies need to understand those markets at a granular level, and recognize that winning in those markets will be harder than they think. He described Tata's seemingly stalled efforts to create a low-cost "people's car" in India. Joachimsthaler's opinion is that the aspirational nature of an automobile means people don't want to buy something known as being "the cheapest."
Brown said P&G's size and stated strategy to expand its market to encompass 5 billion consumers worldwide means it has to look at all tiers of the market. He described how P&G's strategy is to win through branded products that offer consistent "delight" to consumers. He noted that consumers in emerging markets can sometimes be more demanding than consumers in more established markets, and that P&G carefully considers whether it should "go it alone" or partner with or buy local companies to build necessary capabilities. He described P&G's Gillette Guard product as a success story — a low-cost razor that is driving growth in India and related markets.
The full Webinar is available here. You'll see we did our best to answer questions from the audience, but we couldn't get to every question. So, what follows is my attempt to answer a few of the most interesting unanswered audience questions.
With short turnaround cycles to changing consumer habits, do companies sometimes compromise on market research in order to gain competitive advantage against its competitors?
It depends on what "compromise on market research" means. Sometimes the best form of market research is getting out in the market and starting the process of fast-cycle iteration. In many markets, gone are the days where you would carefully optimize a product launch following stage rounds of carefully crafted market research. The world simply moves too fast these days. That doesn't mean launching without learning — it just might mean balancing more towards qualitative research, or using in-market analogies to help support launch strategies.
Does the quality of a product or service changes depending on culture? Or is there an absolute measure we all should follow?
I always start with the assumption that quality is a relative concept. You certainly do see obvious differences in perception in certain categories. For example, the standard of female beauty in many Western markets is tan skin, so people buy bronzers and related products. In some Asian markets the standard is almost translucent skin, so supermarkets are packed with skin whiteners. One theme that carried through the panel discussion is the importance of having true on-the-ground local knowledge, which is a necessary to understand these differences.
How should companies hedge against the practice of copying your products as you go into those markets?
A version of this question came up, and my answer was to always be one step ahead of fast-followers by having a robust pipeline that kept people on their toes. The other part of the equation (which I didn't mention) was to use an integrated business model as a hedge. IKEA is a great example of this. Copying the furniture IKEA makes isn't that hard; copying the entire end-to-end experience IKEA offers is tremendously difficult. It's yet another reason why business model innovation is so incredibly important.
How do you deal with local competitors who may have more insights into consumer needs as well as insights into culturally more attractive solutions such as Chinese herbal actives?
The ability to understand the nuances of a local market is certainly an important asset. Some companies actively seek to partner with or acquire companies to get this skill. For example, in 2008 Johnson & Johnson's consumer arm purchased Beijing Dabao Cosmetics Co., Ltd, who has a number of strong local personal and skincare brands. Many food and beverage companies have recognized that it makes far more sense to acquire locally loved brands than to try to displace them. Acquisitions and partnerships are an important tool for companies seeking to crack into emerging markets.
Does an investor investing at the bottom of the pyramid have to sacrifice returns, as opposed to investing in the middle or the top of the pyramid?
While people have long pointed companies to the so-called fortune at the bottom of the pyramid, the reality is it's just awfully hard for at least some companies to build profitable businesses given market realities. That doesn't mean that people haven't succeeded or won't continue to succeed; it just means that people have to go beyond saying "If we can just figure out a way to get $1 from each Chinese [Indian, Indonesian, Brazilian, Nigerian] consumer ..."? Getting that $1 is brutally hard. There are a lot of social reasons to serve these markets of course, so ignoring them isn't the answer either. It is just going in with eyes wide open.
Considering an emerging market such as Brazil, when participating in a B2B category with commodity products, should a new player in this market put focus on offering the lowest price or try to establish a new momentum with focus on added value products?
I would very much view this as an "and" proposition. If you have sustainable cost advantages because of superior production processes, global scale, unique ability to manage the supply chain, and so on, then push the pricing angle as much as possible. At the same time seek to really understand the target customer and how your product fits into their business model. Typically there are lots of opportunities to help them with inventory management, distribution risk, demand generation, and all the other challenges facing companies in emerging markets. As the old baseball legend Yogi Berra once said, "When you see a fork in the road, take it."
Thanks to my co-panelists, Harvard Business Review, and the Singapore Economic Development Board for an engaging session. I hope to participate in another discussion before too long!