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Emerging markets (EMs) constitute the major growth opportunity in the evolving world economic order. Their potential has already effected a shift in multinational corporations (MNCs), which now customarily highlight EM investments when communicating with shareholders. Coca-Cola, for example, predicts that its $2 billion investment in China, India, and Indonesia, which together account for more than 40 percent of the world’s population, can produce sales in those countries that double every three years for the indefinite future, compared with Coke’s 4 percent to 5 percent average annual growth in the U.S. market in the past decade.1
In aggregate, the proportion of global foreign direct investment (FDI) inflows to developing countries has increased from 18 percent in 1992 to 33 percent in 1996, when it exceeded $100 billion.2 These investments are widely interpreted as heralds of a major restructuring of the global economy; a recent Delphi study of business, policy, and academic leaders placed overwhelming importance on EMs as the source of future growth.3 Governments too are jostling for attention in EMs: the U.S. administration’s export promotion strategy, for example, is centered on the “Big Emerging Markets Policy” launched in 1994 after the Department of Commerce was charged with answering the questions, “If we look toward the next century, where will we find the engines of American growth? What markets hold the most promise?”4
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The new perception of these countries as markets explains the surge of interest. The phrase “emerging markets” is being adopted in place of the previous lexicon of “less developed countries,” “newly industrializing countries,” or even “Third World countries,” which emphasized the countries’ sources of cheap raw materials and labor rather than their markets (see the sidebar).
The EMs’ new attractiveness is partly explained by their “emergence” and a number of economic liberalization measures prompted, in some cases, by the end of the Cold War and the consequent reduced aid from the superpowers and, in many cases, by the demise of communist governments. However, it is also a function of global factors, notably the competition among MNCs in maturing markets in the developed economies. With a few notable exceptions, MNCs’ participation in these economies before this decade was limited to establishing low-cost offshore production operations, accompanied, in some cases, by opportunistic exports and limited marketing activity that was often viewed as marginal, experimental, or even charitable.
However, MNCs now focus on the revenue-generating potential of these markets, and their major basis of competition has shifted to the marketing challenges of creating and capturing the huge latent value. Two developments in the global marketing environment have enhanced the EMs’ attractiveness. First, an identifiable target market has emerged, as the early stages of economic development raise disposable income levels and the increasing reach of international media and MNCs influences product awareness and perception. Second, the Internet has made it possible for small and medium-sized MNCs to reach business customers in EMs that would not otherwise warrant the time and cost of establishing traditional distributorships.5
Marketing in such countries can be intimidating, however. At the operating level, MNCs must confront a range of unfamiliar conditions and problems. What most developed-country companies would regard as basic marketing infrastructure, for example, is largely absent in EMs; there is little or no market data, nonexistent or poorly developed distribution systems, relatively few communication channels, and both a lack of regulatory discipline and a propensity to change business regulations frequently and unpredictably. In addition, EMs are characterized by high levels of product diversion within or between countries, widespread product counterfeiting, and opaque power and loyalty structures within complex networks of local business and political players. Although frequently encountered in a variety of EMs, such challenges are often inextricably linked to the idiosyncrasies of national marketing systems and can be addressed only through customized initiatives undertaken by locally based operating units.
A second, more fundamental category of challenges, and our major focus here, is at the more general level of marketing strategy and would usually be addressed by regional or corporate executives. Corporations need to decide whether to enter EMs, which markets to enter and when, how the product life cycle and the market life cycle might evolve, and how to structure the relationship with local partners. While others have addressed the operational challenges of marketing in EMs,6 there is little guidance for corporate executives responsible for the firm’s strategy across the range of EMs. The default option remains the use of mainstream marketing frameworks formulated and applied in the developed world.
We feel, however, that companies need to rethink these frameworks before applying them to emerging markets. In particular, our field research suggests that MNCs often erroneously adopt a “less developed countries” mind-set, assuming that these markets are at an earlier stage of the same development path followed by the advanced or developed countries, that the game is therefore one of catch-up, and that market evolution patterns seen previously in developed economies will be replicated in the EMs. Interviews with MNC executives based in EMs suggest that the distinctive marketing environments in these countries require a rethinking of accepted wisdom.
First we explore four areas in which companies need to rethink marketing models for EMs (see Figure 1). For timing an entry, we argue that EMs offer additional first-mover advantages. Second, we propose a new framework for foreign market assessment that is demand-driven rather than risk-oriented. Third, we challenge whether the assumptions behind the product life cycle are applicable to EMs and outline the implications for product policy. Finally, we suggest alternatives to the partner policy customarily adopted in developed international markets. Our purpose is to highlight discrepancies between the assumptions underlying traditional models and practice in developed markets and the distinctive dynamics of EMs, in order to help corporate executives in both large and small firms develop new frameworks to support their EM strategies.
Timing of Entry
Despite the long-term attractiveness of EMs, there are reasons for delaying entry. EMs are high-risk environments for entrant corporations, both because of their heritage of political and economic instability, and because of the current stresses resulting from the rapid implementation of economic reform programs. So swift has been the rate of change in many countries that the sustainability of these reforms is questioned, despite such positive factors as countries competing to create a probusiness environment or the precedent of successful shock therapy in Poland.7 At the commercial level, there is additional risk, resulting from the lack of enabling conditions necessary for profitable market participation, such as an efficient and extensive distribution system or effective intellectual property protection. In such circumstances, many companies decide to “wait and see,” attaching greater weight to the risk of early participation than to the potential advantages reaped by market pioneers. This position contrasts sharply with the aggressive investments other multinationals are making in EMs, on the ground that early entry is critical to long-run success. A handful of the largest MNCs, such as ABB, Coca-Cola, and Nestlé, can commit the critical minimum mass of funds into multiple EMs at relatively low risk, given the proportion of corporate sales or investments involved.
Research on first-mover advantages suggests that several benefits may accrue to the first participants in product-markets, including reputational effects as benchmark products, economic advantages from early attainment of critical sales volumes, and preemptive domination of distribution and communication channels. However, the only study examining the applicability of first-mover advantage to EMs concluded that “most of the emerging market conditions appear to inhibit rather than enhance first-mover advantages, raising the possibility that no firm should attempt to pioneer in an emerging market.”8 It argues that the lack of enabling conditions for rapid commercialization impedes the convertibility to profit of early investments and temporary product advantages. Such a view clearly supports the argument for delayed entry into EMs.
Our view is that there are additional sources of advantage to early entrants in EMs, including favorable government relations, pent-up demand, marketing productivity, marketing resources, and consequent learning.
National and local governments and other regulatory bodies are far more influential in EMs than in developed-country market systems. This reflects both the recent history of many emerging-market countries as command economies or closed markets, the desire of many host governments to build local business as the economy grows and FDI inflows increase, and, on a more operational level, the importance of government-led infrastructure projects in the early stages of development. The early establishment of relationships with government can result in tangible benefits such as the granting of one of a limited number of licenses or permits. China, for example, has decided to restrict the number of western MNCs to which it gives joint-venture permits in many industries.
In addition, many EM governments are still establishing new probusiness regulations, and MNCs already investing in an EM will be favorably positioned to influence the regulation of the market in price control or the opening of communications media. On a more general level, early market entry may also demonstrate a commitment to an emerging market that wins longer-term government favor. Executives familiar with EMs invariably stress the great importance of personal relationships with key local players, in both the public and private sectors, and MNCs that have participated longer in the market will enjoy stronger, more favorable relationships than later entrants. First entrants also get access to the best government-nominated local joint-venture partners.
There may be a substantial reservoir of pent-up demand for previously unavailable but known Western brands in EMs, offering a higher sales level than most models of first-mover advantage assume. In former command economies, surplus or unsatisfied demand prevailed for many years in a “seller’s market,” in which choice was so restricted that cash was not spent.9 Now customers may already be aware of a product, even though previously unavailable in their country, through international travel, international media, or through informal channels. In many cases, therefore, conditions may be different from those encountered in the introductory stages of product life cycles in developed markets, where slow diffusion of product awareness and familiarity often result in slow sales take-off after launch. The distinctive conditions of EMs provide first entrants with a nonrecurring beach-head of sales, which can provide medium-term advantages through repeat purchase.
EMs’ low cost base has long been considered in decisions on production location, but it is also relevant to the timing of market entry. In this case, the comparison is not only with global costs but also with future costs. Low advertising rates per capita in EMs enable companies to launch brands and build brand awareness very economically. Advertising rates increase rapidly with economic development; for example, they increased tenfold in real terms in Poland within five years of the fall of Communism. Lower levels of competitive spending in EMs can also mean that marketing investments produce higher levels of awareness, share of mind, or shelf space.
While companies may frequently cite an undeveloped marketing infrastructure to justify delaying entry, the lack of infrastructure can also be a benefit. Resources such as distribution channels or media access are often more scarce in EMs. Although the number of managers with both emerging market and international experience is growing, it remains a constraint and thus a potential advantage to multinationals that have entered multiple EMs and therefore have developed a pool of experienced managers. This is a difference of degree rather than of kind; the preemptive advantage accruing from such factors is recognized in research on first-mover advantages, but the effect is qualitatively more significant in EMs.
EMs often demand and certainly provide opportunities for innovation in marketing or operations, and the consequent learning can be transferred to other markets. The differential ability of MNCs to leverage leading-edge ideas and best practices across operating subsidiaries, in marketing and other functional areas, can be a critical source of competitive advantage.10 For example, due to the lack of developed distribution infrastructures in many EMs, multinationals have created innovative distribution processes or product packaging that is transferable to developed markets. The scale of many EMs also offers opportunities: fast-food chain KFC is pioneering its largest restaurants in China, which are, on average, twice the size of outlets in the United States, due to the greater emphasis on eating in the restaurant rather than taking food out. KFC’s knowledge of how to run large-scale outlets may be transferable to developed markets. Such reverse learning from emerging to developed markets, which can be driven either by the need to adapt to unique market conditions or by “second-time around” learning from previous mistakes, can give emerging market pioneers a competitive advantage. Also important is the leverage possible from developing the capability to manage EM operating units, given the steep learning curve that MNCs face and the fact that most feel pressured to enter a series of EMs in quick succession.
Another important aspect of first-mover advantage is the potential for smaller players in an industry to competitively leapfrog. If an industry leader delays entry into EMs, a lower-ranked competitor may find entry more attractive. Mary Kay Cosmetics, historically an industry laggard in internationalization in developed markets, is giving its larger competitors such as Avon tough competition in emerging markets such as Russia and China, where both companies started operations at about the same time. For young or start-up firms, keenly aware of the importance of global competition and customers, EMs often represent a more attractive way of being “born global,” because of their high growth rates, less established brand preferences, more fragmented industry structures, and less intense competition.11 For example, ECM, a London-based media planning consultancy, has opened its second and third offices in Beijing and Manila.
Managers interested in entering EMs often find it difficult to assess the relative attractiveness of the many alternative country-markets. The traditional frameworks for foreign market evaluation don’t apply. First, such models often depend on macroeconomic and population data that are inaccurate or outdated in EMs. One inaccuracy is the size of the gray economy, a significant aspect of many EMs, so official GNP figures frequently understate the size of the economy. Second, the models assume the availability of operational data, such as sales levels or the number of distributors, which may simply not be available in the information-poor environments of EMs. Third, such models are generally static “snapshot” assessments rather than dynamic evaluations and thus ignore the long-term potential of EMs and their rapid rate of change.
In these circumstances, managers frequently base decisions not on objective market screening but on their own comfort level, choosing a predictable sequence of markets beginning with those closest in “psychic distance” to their home culture. Empirical research has repeatedly shown that, in all foreign markets, many corporations follow an incremental and opportunistic process, utilizing existing networks of contacts to make minimal commitments that increase gradually with sales growth.12 In EMs, however, a more rigorous form of market screening is required. The previously closed nature of many of these economies means that most MNCs will have few links with business networks. Moreover, the scale of the opportunity — in other words, the number of countries to assess — is so large it taxes even the most resourceful MNCs. Even a company limiting its attention to one or two of the largest EMs is likely to be constrained by resource shortages not merely of capital but of executives capable of leveraging the firm’s assets in such environments. Some framework for prioritizing market opportunities is therefore essential.
MNC players in EMs typically accept short- to medium-term country risk because of the enormous long-term market potential. They regard the factors causing country risk, notably the political and economic dynamics, as more volatile than the underlying market potential. According to this view, it is misguided short-termism to base corporate strategy on structural conditions that may be subject to rapid change, even though these may be suitable criteria for evaluating investments in emerging-economy stock markets, for example. Moreover, although the enabling conditions necessary for profitable market participation may be absent in the short term, they are developing rapidly in many EMs, and, as discussed in the previous section, those companies already present are in a position to influence their development.
Existing foreign market assessment frameworks rarely capture the criteria on which these MNCs base their initial decisions. Specifically, the models consider macroeconomic and political risk criteria too early in the process, with the result that many high-potential EMs are filtered out. Building on the distinction between long-term market demand potential and short- to medium-term profit conversion potential, we propose a nested model as a more appropriate framework for EM assessment (see Figure 2). This model is market-demand driven with risk adjustment, rather than being risk-driven with adjustment for demand potential. In our view, it is therefore appropriate for assessing the marketing (as opposed to the investment) opportunities in EMs and provides a strategically-based foundation for managerial judgments on market selection.
The framework has three distinctive features:
First, the nested approach enables a stage-gate process with sequential, incrementally discriminating phases of market assessment, after which each of the number of candidate country-markets can be reduced. This is the basis for a sorting of country- markets into a portfolio according to priority, in contrast to the simpler “go-no go” output of current frameworks.
Second, our framework is based on progressively detailed and market-specific data for assessment, beginning with the limited demographic and economic measures that permit an assessment of future demand and are available for virtually all countries and progressing to data specific to both product-market and country-market.
Third, this model puts long-term considerations of market potential before more immediate measures of country risk and profit conversion potential. This contrasts with existing models that attach great weight to national macroeconomic indicators and investment risk measures, on which data happen to be readily available through governmental and commercial information providers. Such measures are far removed from the dynamics of specific product-markets, and the overall evaluation is likely to overstate the risk involved in market entry relative to the potential rewards and screen out high-potential candidates prematurely in the process.
The three elements of the assessment framework are assessing long-term market potential, identifying business prospects, and predicting potential profits.
Assessing Long-Term Market Potential
The first step is to assess the relative scale of the demand opportunity. Without reliable data on current expenditure levels or industry sales, a company must assess market potential using population and GDP trend figures. Therefore, an appropriately simple formula for an assessment of market potential is:
Q = total market potential
P = national population
NP = new population, i.e., population growth in planning period
DevGDP = average per capita GDP in developed markets
AdjGDP = GDP in emerging market adjusted to purchasing power parity (PPP) level
This formula indicates market potential by relating national population to the difference in wealth between the emerging market and a developed-market average. While this cannot be interpreted as an absolute measure of future market size, it approximates a relative indicator, since it employs only information readily available on almost all countries.
We adjust the two basic measures, population and income level, to give a fine-grained view. And we adjust population by its growth rate in order to assess future potential. To illustrate the discriminatory power of this simple adjustment, we can compare two large EMs with comparable current populations, Russia (148 million) and Pakistan (132 million). According to United Nations population forecasts for the year 2050, Pakistan’s population will by then be almost double that of Russia (340 million versus 180 million), putting it third in rank behind India and China. Even during a ten-year planning period, the fact that Pakistan’s population growth rate is ten times that of Russia (3 percent versus 0.3 percent) is critical to assessing market potential.
The second element of this formula produces a measure of the country’s relative stage of economic development by comparing its per capita GDP with the developed-market average. The important adjustment here is to purchasing power parity (PPP), reflecting the “real” rather than the nominal value of the GDP.13 Although China’s 1995 per capita GDP of US$620 makes it appear less attractive than the Philippines’ $1,050 or Latvia’s $2,270, differences in living costs mean that the population in each country has similar spending power (PPP is $2,290 for China, $2,850 for the Philippines, and $3,370 for Latvia). This is particularly important in assessing emerging markets because of the “threshold effect,” the phenomenon in which disproportionately large increases in demand result from small increases in wealth as consumers pass thresholds of disposable income that trigger their ability to purchase additional goods, such as consumer durables, for the first time. This effect may be reinforced by the availability of consumer credit in a particular country, and it is therefore important to understand the income level at which consumers may be able to obtain financing for items such as televisions, air conditioners, or refrigerators.14
Identifying Business Prospects
Having identified favorable potential at the country-market level, the second stage of assessment is to undertake creative, customized assessment of the business prospects for each product-market in those EMs under consideration. Since reliable market research data are often unavailable in EMs, companies must identify their own indicators to serve as acceptable surrogates for assessing demand.
For example, Mary Kay Cosmetics compares a female secretary’s average salary in an EM to the volume of product sales necessary for a consultant to exceed this income level. On this basis, Mary Kay can assess the number of women likely to be attracted to the role of beauty consultant and, on that basis, predict the sales volume likely in a given market. Similarly, to prioritize Asian markets before launching new credit card products, Citibank identifies the number of consumers in each country with annual incomes over a minimum cut-off point and the penetration rate of existing credit cards among those consumers.
Such approaches to market assessment require local knowledge, modest resources for some field investigation, occasional creativity in identifying suitable indicators, and a willingness to proceed on managerial judgment without the backup support of detailed research data.
Predicting Potential Profits
Finally, our model adjusts for the extent to which a company can extract value from a market over five years. This is a function of national political and economic risk and the development of enabling conditions in the commercial sector, such as distribution and the telecommunications infrastructure. These factors can change significantly over the short term, as experience in EMs in the 1990s has demonstrated. While local knowledge can be the basis for informed judgments on convertibility to profit, the commercial risk indices that organizations such as The Economist Intelligence Unit (EIU) and Control Risk compile for international investors are also valuable. In addition, companies can assess the extent to which enabling conditions work in the MNC’s favor by examining the concentration of population in urban centers versus rural villages, the distribution of wealth, and business indicators such as advertising spending in the country-market or the penetration of key consumer durables such as telephones, televisions, or cars.
While none is a perfect predictor of the probability of profitable market participation, using these variables is consistent with the creative, customized approach to market assessment that we advocate. The urban concentration of population is relevant because metropolitan areas tend to have higher levels of disposable income than nations and because a concentrated population permits more efficient selling, advertising, and distribution. The distribution of GDP is a critical factor shaping demand; in China or India, for example, the low average GDP masks the presence of some 100 million people with high incomes. With regard to the level of advertising or the penetration of consumer durables, MNCs must select which indicator is more relevant to their business. Even if there is no direct link between these indicators and an MNC’s product-market, they can be interpreted as measures of the development of the country’s commercial infrastructure.
Because of its stage-gate structure, this framework can be used to sort EMs into categories on the basis of differences in short- and long-term potential (see Figure 3 for a portfolio grid showing such a categorization). The first distinction is between leading and trailing EMs, reflecting the substantial diversity in the economic character of countries usually considered as EMs. Leading EMs, high in both long-run demand potential and short-term profit conversion potential, warrant substantial and continued investment. The dominance of the leading EMs and, in particular, China is reflected in the fact that this one country was the destination of approximately two-thirds of all FDI inflows to the developing world in 1995. Other countries usually regarded as leading EMs include India, Indonesia, and Brazil. Trailing markets, low on both factors and thus rarely able to attract inward FDI, include most of sub-Saharan Africa, South Asian countries such as Myanmar, and even the less developed regions of more attractive countries such as China.
The more difficult markets to assess are those in which there appears to be a discrepancy between the long- and short-term attractiveness. Russia, for example, undoubtedly scores high on long-term market potential but is lower on short-term profit conversion potential. In such cases (the upper left corner of our matrix), the most appropriate strategy is to adopt a platform investment strategy, establishing a beachhead presence in one or two major cities while ensuring sufficient flexibility to commit further or scale back investment as prospects alter. To minimize in-country risk, for example, many MNCs hold reserve inventories in warehouses in Finland close to the Russian border.
The opposite combination (lower long-run potential but good short-term prospects of extracting profit) merits more aggressive investment, both to commercialize the opportunity and to build managerial capability in EMs. Some markets, such as Chile, the Czech Republic, and South Africa, are also seen as regional entry points and thus merit additional investment in the establishment of a keystone marketing organization capable of supporting a multicountry operation.
Another market-entry criterion that bears on profit potential and reverse learning is the degree to which adaptation of an MNC’s product line or service offerings is a prerequisite for success. Such adaptation will cost time and money and can be justified only if the prospects for value creation and extraction more than cover the adaptation costs. The product policy that most MNCs adopt in EMs involves offering a narrow range of existing products (that is, proven products, designed for and already established in other country-markets). In many cases, companies position established products as premium imported goods and target them at the relatively small percentage of affluent customers, usually concentrated in the country’s major cities. The unit margins can often be higher than those in the more competitive developed-country markets, where market segmentation and product customization are more prevalent. An alternative is a product policy of “backward innovation,”15 consisting of a narrow range of basic or stripped down products, which the corporation has “value-engineered” for the different conditions in EMs, and which are affordable, easy to use, reliable under tough environmental conditions, and easy to maintain.
By offering a narrow range of established products, MNCs are restricting their investment in countries high in environmental risk and market uncertainty and without the sales volumes or, in some cases, the technical skills to support local product development or other marketing investments. Such product policies are also in line with conventional marketing wisdom and, in particular, product life cycle theory, which suggests that products in the introductory phase should be simple, easily understood, and targeted only at the more innovative market sectors.
This model assumes first that, at such an early stage, a product-market is likely to be relatively homogeneous, without the segmentation to support a wider product range. Second, the model assumes that only a small proportion of inherently risk-prone customers will experiment with a new product and that only after slow diffusion will the new product find a wider market. With EMs categorized as “introductory” in character, this line of thinking leads to the widely published concept of the international or global product life cycle16 (see Figure 4). Products at or near maturity in their slow-growth, fragmented, and highly competitive domestic markets should, in this view, be the anchors of product policy in EMs, where market conditions are comparable to those prevailing in earlier years when the same products were introduced in their home markets. The obvious attraction of such a policy is the potential it offers for extending the life of a mature product facing an uncertain, unprofitable future in developed markets.
Although these policies may have proved effective in the past, they may not be appropriate today given rapid information flows through telecommunications, the Internet, and overseas travel. Consumers in emerging markets see no need to use products that are now mature and obsolete in the developed world; they want the latest products now, partly as a matter of pride and partly as a matter of choice.
Mainstream product life cycle theory assumes that consumers are unfamiliar with the new product; this theory inhibits take-off in demand, limiting it to innovators, and requires communications programs oriented toward customer education. In EMs, however, many EM customers may already be sufficiently familiar with the products; they may have encountered them while traveling outside the country, may have encountered smuggled, diverted, or counterfeit versions in their own country, or may have seen them in the increased international media. As a result, potential customers are likely to be more numerous than in developed country-markets. In fact, these consumers are constrained only by their financial resources, not by their lack of familiarity or sophistication. This is particularly true in industrial product-markets, in which production plants in EMs are the most recently built greenfield investments and therefore represent the global state-of-the-art in manufacturing, rather than being less-developed laggards.
The lack of an installed technological infrastructure in EMs facilitates leapfrogging, in which a market adopts state-of-the-art technology from the outset, rather than progressing through the generations of technology that have characterized industry evolution elsewhere. For example, the telecommunications market in such a country might develop as a radio-or cellular-based product-market, since it offers a faster, more efficient way to achieve market coverage than the painstaking, expensive construction of a terrestrial cable-based network. Indeed, the installed infrastructure in western countries may render their telecommunications development slower than in some EMs. Hungary, for example, is scheduled to be the first country with a fully digital telecommunications network in 1999. Technological leapfrogging demands that entrant firms acknowledge a high level of customer sophistication in EMs and capitalize on the opportunities for reverse learning.
Just as technological leapfrogging is made possible by the lack of an installed infrastructure, so cultural differences may lead to cultural leapfrogging. In a rapidly changing social environment, EM customers with newly acquired disposable income may be less conservative and traditional than their developed-market counterparts. For example, F&P Gruppo, marketers of Gallo rice products, is finding greater response to its convenient, quick-cooking rice products in some EMs, such as Argentina, than in its more tradition-oriented Italian home market.17 Such differences not only produce unanticipated patterns of market development but also provide opportunities for reverse learning for those MNCs willing to innovate in EMs.
The “less developed” model of EMs assumes that customers will pay a premium for imported brands and that an increasing number will trade up to high-status imported brands as an economy develops. In fact, there are warning signs that growing sophistication will not automatically result in growing demand for global brands and that emerging-market customers rapidly become more value-conscious and more demanding of international companies’ offerings. A recent McKinsey study conducted in major Chinese cities, for example, found that only 14 percent of buyers were willing to pay a premium for imported goods over locally made equivalents.18 This may reflect not only consumer characteristics, such as an affinity for local brands, patriotism, or a cultural predisposition toward price in purchase decisions, but also the sharply increasing quality of local brands and government pressure (evident now in China, for example) to cap the market shares of MNCs for their global brands. With global brand premiums vulnerable, MNCs may want to develop local brands, typically through acquisition, to position along with global brands in their overall product portfolios. Unilever, for example, has expanded primary demand for detergents in EMs by developing local brands such as Ala in Brazil and Wheel in India, which it markets alongside its global brands such as Surf.19
The prospect of distinctively different patterns of market development has several implications for multinationals entering EMs. First, in those markets where many customers are ready to buy into the product category without education, it is often possible to bypass the slow-growth introductory phase and expand the market rapidly. MNCs’ assumptions of slow initial market development may be self-limiting. Second, a multi-tier product range of global imported brands and locally made, joint venture brands may be the most appropriate response to a complex, rapidly segmenting market that has rapid switches in growth rates between global and local brands and a “dual economy” reinforcing unfamiliar segmentation patterns. A product range that spans quality/price points requires a departure from developed-market practice, in which the range is usually expanded incrementally beyond an anchor brand. Finally, EMs may be suitable test beds for product innovation rather than merely windfall opportunities to extend the life cycles of mature products.
Partner Policy and Distribution
Companies frequently cite the lack of a functioning distribution infrastructure as a reason to delay entry. In China, the notorious difficulties of achieving coverage, often through a fragmented yet still government-controlled distribution system, and securing payments of accounts receivable have deterred many MNCs (even those investing in production facilities in the country) from early entry.
In practice, however, marketing disasters in EMs more often result from the breakdown of the MNC-distributor relationship, rather than from a weak distribution infrastructure. International companies, reliant on local distributors for market knowledge and, in many cases, legally required to enter equity joint ventures with local firms, frequently find themselves unable to influence distributors. As a result, many either cut back their expansion plans, withdraw from the market altogether, or switch to direct distribution.20
Distribution strategy is the fourth and final element of marketing policy in which companies need to rethink models for emerging markets. Decisions on entering foreign markets focus on the choice between direct (vendor-owned subsidiary) and indirect (independent distribution) channels. In fact, entrant MNCs have little choice in EMs but to find local distributor partners. Local regulations often require a domestic partner, and MNCs are constrained by their unfamiliarity with the market and insufficient resources, both capital and human. Because of these same factors, the local distributor’s role is qualitatively different from that familiar to MNCs in developed markets.
To reflect the fundamental difference between the two types of market environment, we use the term “partner policy” to emphasize that there may be a need for cooperation on strategic issues as well as on the execution-oriented tasks of the traditional distributor’s role. Whereas distributors in developed markets undertake a defined range of functions (such as warehousing or product sorting) for which they are well qualified, intermediaries in EMs often perform additional marketing functions (such as selecting target markets or promotion strategy), which elsewhere the international company controls through its own subsidiaries. The “distributor” is, in fact, a local marketing organization, made necessary by the company’s lack of local marketing knowledge and operating capability.
The design and management of relationships with these marketing partners — which may include licensees and promotion partners as well as traditional distributors — are the most critical managerial challenge in the unfamiliar EM environment. Traditional distribution strategy models, which assume that firms will choose a channel to execute the defined distribution functions most efficiently, fail to reflect the complex distributor management in EMs. In the case of a local partner that is a traditional distributor, MNCs frequently find that sales plateau after a few years, as easy sales have been generated through existing channels without additional investment in business development. In many cases, MNCs find that their marketing policies, in areas such as pricing or channel selection, have been ignored. In the worst cases, attempts to remedy the situation are counterproductive, provoking costly legal disputes that disrupt business. To avoid these problems, we have identified four aspects of partner policy in which MNCs with substantial EM experience are adapting the approaches employed in developed markets: industry experience, direct selling, local autonomy, and exclusivity.
Many multinationals search for local partners among those already established in the product-markets in which the MNCs want to build. While this selection criterion makes it easier to obtain the necessary introductions to local business and government networks, it may also exclude more entrepreneurial and change-oriented local business. Seeking the best position in an established business system is appropriate in relatively stable developed-country markets but may be suboptimal in EMs, for two reasons:
First, the undeveloped distribution infrastructures in many EMs, combined with the near certainty of continued rapid change, offers little stability to players in the established business sector and the potential of rapid gains for more innovative players prepared to invest in new marketing channels. The establishment of new distribution systems is, indeed, a fundamental part of the “emergence” and a critical driver of economic growth.
Second, many MNCs form better working relationships with local partners they select on the basis of competence in working with MNCs, rather than on the basis of product-market familiarity. In many cases, a partnership with a local distributor involved in the same business leads to disputes over how to do things, rather than a productive exchange.
There may be rewards for MNCs prepared to experiment with innovative channels to market, rather than waiting for the development of more efficient broad-market distribution systems. In EMs, direct selling is necessary because of the relative lack of distribution and communications infrastructure and is feasible due to the availability of low-cost sales personnel. International corporations may find it economically attractive to invest in their own fleets of vans or trucks, for example, or sell to customers via bicycle vendors or street kiosks, channels that they would reject in developed markets. Warner Lambert has more than 30,000 street vendors selling its Chiclets brand in Colombia, for example, and van rancheros are common distribution channels for rural areas throughout Latin America. Similarly, companies may take on new partners to develop shared distribution facilities.
We should emphasize that the power of new electronic media, notably the Internet, is not restricted to developed economies. Indeed, given the limits of conventional distribution channels in EMs, their value may be higher, albeit in only a small market. Worldwide electronic marketplaces allow local businesses access to a range of product choices and price quotes that can diminish the local distributors’ often exclusive power. Industrial customers in particular are likely to find it economically attractive to establish electronic links with suppliers and customers outside their country.
The tension between corporate control and local autonomy is particularly problematic in EMs, given MNCs’ extreme unfamiliarity with the local marketing environments. In these circumstances, MNCs generally grant partners significant control over marketing decisions such as pricing structures or promotional strategies. Many local partners continue to conform to local business norms, rather than taking to heart the MNC’s long-term growth expectations. In many EMs, for example, distributors place a far higher value on an immediate sale than on adopting quality and value-added services in order to build a long-term price premium and will consequently negotiate prices below the MNC’s standards. This, in turn, sets up the possibility of diversion, with shipments directed out of the low-price market, thus affecting the operations of multiple country organizations. For example, the adhesives corporation Loctite, which builds its business plans on value-pricing rather than cost-plus pricing, identifies price maintenance as the most critical aspect of partner policy and explores this issue at length when selecting a partner.
Similarly, the expectations of the MNC and the local partner on frequency of sales calls or the extent of technical information or after-sales service may differ. In many cases, MNCs plan to switch to direct distribution soon after achieving a critical mass of sales in order to gain greater control over their business, because distributors follow their own interests. Such disruption can be avoided, and sales growth managed more effectively, if the MNC avoids delegating all marketing policy to a local partner in favor of defining clearly the tactical decisions that the local partner controls.
Local distributors almost invariably demand territorial exclusivity in EMs. Multinationals generally grant it on the ground that the investment required in market development would be inhibited by competition among distributors. This again is a policy better suited to market development based on slow adoption of a new product. In the rapid market expansion scenario more likely in EMs, however, achieving efficient market penetration quickly and preemptively is more appropriate. Multiple partners, either for different geographic regions or for different product lines, may mean some loss of control and increase administrative complexity. However, multiple partners may be preferable if more rapid market penetration is the result. For firms following a multitier product policy involving new products with which the partner is progressively less familiar and therefore less able to accelerate the pace of market penetration, such a policy is more appropriate.
In summary, these adaptations constitute an approach to partner policy appropriate for market development, in contrast with the incremental approach that MNCs usually adopt in the early stages of market entry, which considers minimizing risk as the primary decision criterion. In fact, many MNCs find that foreign market entry at arm’s length often leads to costly intervention later. By remaining open to multiple partners and willing to balance local initiative with corporate control, MNCs maximize their chances of profitable market development in the long term.
There are four key areas where MNCs will have to change their traditional strategic marketing assumptions when approaching emerging markets. When contemplating market entry, MNCs should consider the additional sources of first-mover advantage in EMs and adopt a demand-driven model of market assessment. Once an MNC decides to enter a market, it needs new frameworks to guide its product and partner policy decisions. Those MNCs already accumulating EM experience are beginning to adapt their developed market strategies as they tackle the complex, volatile, high-potential opportunities. As practices change, marketing models likely have to change to embrace the practices and new learning coming from emerging markets.
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13. Purchasing power parity (PPP) data are widely available, for example, in World Bank GDP reports.
14. We acknowledge an anonymous reviewer for emphasizing the availability of consumer credit in assessing potential demand.
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19. Ad Age International, March 1997, p. 136.
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i. M.R. Czinkota and I.A. Ronkainen, “International Business and Trade in the Next Decade: Report from a Delphi Study” (Washington, D.C.: Georgetown University, working paper 1777-25-297, 1997).