Thirty years of emerging market strategy: a review

When managers in the West hear about the emerging middle class of India or China, they tend to think in terms of the middle class in Europe or the United States. This is one sign of an imperialist mind-set—the assumption that everyone must be just like us. True, consumers in the emerging markets today are much more affluent than they were before their countries liberalized trade, but they are not affluent by Western standards. This is usually the first big miscalculation that MNCs make.

When these markets are analyzed, moreover, they turn out to have a structure very unlike those of the West. Income levels that characterize the Western middle class would represent a tiny upper class of consumers in any of the emerging markets. Today the active consumer market in the big emerging markets has a three-tiered pyramid structure. ~ The End of Corporate Imperialism by CK Prahalad and Kenneth Lieberthal, HBR “Best of 1998”

Ever since Theodore Levitt first published his 1983 classic “The Globalization of Markets“, companies seeking new pastures have repeatedly erred in their assumptions of consumer behaviour. Was it corporate imperialism that led Levitt to make the following inference –

The worldwide success of a growing list of products that have become household names is evidence that consumers the world over, despite deep-rooted cultural differences, are becoming more and more alike – or, as the author puts it,”homogenized.” In consequence, he contends, the traditional MNC’s strategy of tailoring its products to the needs of multiple markets may put it at a severe disadvantage vis-a-vis competitors who apply marketing imagination to the task of developing advanced, functional, reliable standardized products, at the right price, on a global scale.

– or simply a function of the times, where McLuhan’s global village was not as small as the advances in communication technology and computers have made it today?

Standardized products for a homogenized world was such an extremely attractive vision that it has continued to be hard to dislodge in the 30 years since it was first shared in print. Its easy to adopt and implement while reality’s fuzzier, more chaotic and nuanced challenges have continued to batter organizations such as Kellogg’s with their cornflakes in India or Whirlpool with their World Washer design failure.

Tarun Khanna and Krishna Palepu released their thoughts on “Strategies that fit Emerging Markets” in 2005, where they cautioned against too much reliance on composite indexes as a measure of attractiveness for a  new market opportunity and risks of implicit assumptions.

Companies often base their globalization strategies on country rankings, but on most lists, it is impossible to tell developing countries apart. According to the six indices below, Brazil, India, and China share similar markets while Russia, though an outlier on many parameters, is comparable to the other nations. Contrary to what these rankings suggest, however, the market infrastructure in each of these countries varies widely, and companies need to deploy very different strategies to succeed.

However, when one looks over  the theories and recommendations released from the hallowed halls of academia in the past few decades since the mantra of Globalization changed into the direction of Emerging Markets, a pattern emerges that leads one to question how much professional and academic competition between the leading lights influenced the resultant concepts published? No wonder management continued to fall back in confusion to rely on the simpler path offered by Levitt.

All authors and management thinkers in this space agreed on one point though, that these emerging markets or emerging global middle classes – whether those in 2012 or those from 30 years ago – aren’t going to be as easy or simple to capture as traditional markets from mainstream consumer culture had been.

Metrics alone cannot tell the human story nor paint a realistic picture of the operating environment’s challenges yet again and again, we hear that economists and analysts are struggling to quantify or measure the emerging middle class opportunity rather than to understand it. As the Director of the OECD’s Development Center describes  in 2012:

Despite having incomes which are above international or even national poverty lines, middle classes in many cases remain vulnerable. Their employment (many work in the informal sector), education (few have university degrees) and consumer behaviour do not coincide with perceptions of a middle class that drives domestic consumption and growth. For instance, in Bolivia, Brazil, Chile and Mexico there are up to 44 million informal middle-class workers, more than 60% of the total middle-class working population of 72 million. Not surprisingly, social protection systems fail to reach even half of this population, as coverage rates of informal workers are extremely limited: below 15% in Brazil, Chile and Mexico, and almost negligible in Bolivia.

This middle class is unlike that which became the engine of development in many OECD countries.

This framing is not very different from what Prahalad and Lieberthal were saying in 1998, simply the geographies of these emerging middle classes have changed or new and emergent population segments risen in their income levels in the old BRICS.

Yet attempts continue, with  the latest using personal car ownership as a quantifiable measure, glossing over the impact of realities in each of those environments such as fuel supply challenges, exchange rate volatility, lack of spare parts or basic infrastructure such as tarmac roads on purchasing decision or ability.

This driving need for numbers seems to be the tyrant holding back the reins of successful strategy development for addressing the very real opportunity that these emerging global middle classes offer. As the authors of the car counting article confidently say –

Consumer spending in developing countries has been increasing at about three times the rate in advanced countries, and we’re not just seeing a growing demand for necessities, but also for middle-class staples such as meat, toothpaste, cell phones, and air-conditioners.

– making blithe assumptions on the class status of toothpaste and cellphones much less whether they count as necessities or not, a fact that far more successful global brands like Colgate-Palmolive or Nokia may beg to differ. In the Philippines I can purchase a flat foil pack of Colgate toothpaste for a peso or two in smallest sari sari shop upcountry.

So what does the future hold for emerging market strategy when mega multinationals like  Proctor & Gamble announce they are putting the brakes on emerging market expansion to focus on securing their domestic strongholds?

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