Drivers, Strategies and Business Models for Emerging Markets

WHAT IS AN EMERGING MARKET?

There is no clear cut definition of what is an Emerging Market (EM). The general idea of what is an EM is
understood, however, different organizations and economies define emerging market differently.
EMs are those countries which have a high growth potential and developed countries expect to do
business in the future. As industrialized countries continue to mature (GDP growth of 2% per year), EMs
are those countries which express a higher rate of growth: 6% to 12%. They have a huge scope for
expansive growth, and hence are becoming gradually more attractive and promising for developed
countries. Over the last years, even EMs are showing broad interest in other EMs due to either regional or
cultural affinity.
Emerging markets in general meet the below criterions:
Economic development is low, so in general, it is a less-developed country
Liberalization is starting up and the Government realizes that stability in politics is a key to
growth. Frameworks for opening up the market is underway and more democracy is generally
being observed in the society which is making growth conducive.
GDP growth rate is hovering around 5% or higher consistently which is a result of Government
trying to create a market based economy.
There is room for growth in the future, sort of difference between the levels of development
achieved against average GDP of developed countries
1
.
WHAT ARE THE CHARACTERISTICS OF AN EMERGING MARKET?
1. Physical Lack of infrastructure when it comes to telecommunications, transport and power.
Movement of people from rural areas to urban, leading to Rapid urbanization which in some
cases is uncontrolled.
2. Political and Social There is general instability in the Governments and lack of legal frameworks
for dispute resolution for corporations. There are unique cultural issues in each of the country
(and sometimes in the states within). There is a general weakness in the social structures, which
needs to keep everything tied together and there is low or no technological advancements.
3. Economic Purchasing power is limited for majority of the population and most of the wealth is
controlled/owned by 2-5% of the population of the country. There is however rapid growth in
their service sectors and due to markets opening up, there is huge scope of development.
4. Moving from low product innovators to pursuing low end innovations in order to stay relevant to
local consumer needs
5. Companies from EMs leverage local market knowledge to compete with global companies and
brands
Due to the potential of higher economic growth and higher returns on investment, EMs are receiving
increased attention from developed economies. EMs still are distinct from each other compared to
developed markets and provide benefits of diversification to a corporate entity. Despite all that is going
on for EMs, there are a lot of issues and concerns associated with EMs which are not there in developed
economies.

Some of the traditional methods used by companies from developed countries in EMs -

1
The Next Emerging Giants Take Flight by Alicia Garcia-Herrero
Drivers, Strategies and Business Models for Emerging Markets

Place to harvest mature or declining products One of the simplest way to look at the Tier 3, 4, 5
of an EM was to offer a successful product from developed country when the product had passed
its life cycle (Nokia for example).
Acquire local brands and marry them with global footprint Acquire a local successful brand, and
match it up with the companys existing product portfolio. In most cases, this also meant that that
the distribution model and marketing channels were same as other products of the company
(Coca Cola for example).
Last to receive latest technologies and product developments Just as point 1 above, when new
technologies were being developed, they were for the developed market. EMs always got new
products and technologies at last and sometimes they were not suited to EMs at all.
All EMs are similar Another aspect of looking at EM strategy was to consider all EMs as one of
a kind and no individual focus was given to identifying market needs.
Some key trends
Developed/Developing economies are investing in Emerging Markets
o Source of raw materials and commodities
o Efficiency seeking businesses, find availability of skilled, high value labor and wage
adjusted productivity very important
o Location for complex manufacturing
o Loose labour market regulations reduces hiring/firing costs
o Economic and physical infrastructure improvements
o Market for sophisticated developed country products
Serving the huge market
o To service the domestic demand in host country as economic development increases and
potential for growth improves
o Due to long term nature, once investments are made companies remain committed to
their businesses
o Investors feel compelled to develop a presence in order to not miss out on opportunities
o Proximity to developed markets add attractiveness
Emerging markets are investing in other emerging markets
Emerging markets are reaching out to their domestic customers

The paradigm shift: EMs were constrained only by human imagination
Look at EMs as a marketplace full of opportunity and not just another prospect
Look at Tier 3, 4, 5 of an EM as active consumers whose needs are only going to increase as their
economies develop and give them more Purchasing power
Look at EMs for disruptive innovation or reengineering products based on usefulness to the poor
and developing new technologies
o User driven innovation/user engaged innovation
o Lean innovation (good enough products)
o Disruptive rather than incremental
Drivers, Strategies and Business Models for Emerging Markets

To actually make the most out of the business opportunity that the EMs present, companies from
Developed markets need to redo their strategies and models for EMs. This doesnt just mean they need
to adapt their current business model, but in some cases also create new business models
2
.
Just like IT service providers and telecom providers before them, companies need to figure out a
model where consumers only pay for what they use. Or, provide the service to a large group at
one place, so that variable costs can be reduced. (As is the case currently, use third party
vendors/Self-help groups/NGOs to provide the services at marginal costs)
Reduce the costs of acquisition by utilizing the fixed assets at optimum level. This would allow
economies of scale and push the cost down.
Reengineer the products and break it down into smaller parts which can be built by local
population which is not as skilled. This would work best where a cyclic function needs to be
performed on a high volume basis. (Example of Arvind Eye Care in India)
Use the already set up distribution model for a higher value or another product altogether. This
would not only help recover fixed costs, but would help in upselling more products from one
place.
In comparison to how companies operate in developed markets, EMs require disproportionate role of
non-market strategies. The best market strategy might fail, without proper attention to non-market
strategies.










EM Opportunities: Africa vs South Asia



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Emerging Markets, Emerging Models by Ashish Karamchandani, Michael Kubzansky and Paul Frandano, March
2009
Drivers, Strategies and Business Models for Emerging Markets

Introduction to Africa
As mentioned in The Plundered Planet, Africa is the last major region on
Earth that remains largely unexplored
3
. Businesses around the world are
still not aware of opportunities in Africa. Africa is disjointed in many
different countries, and for decades, investor ignorance did not matter.
Apart from a few exceptions the economies were so badly run, that there
werent many opportunities for firms who wanted to run legitimate and
effective business. But, things are changing now. Macro level economic
reforms controlled the inflation and helped open the economy for
international trade. Change in national growth rate mirrored in the
increased profitability of companies operating in Africa.
One of the missing elements in Africa, has been the lack of role models
coming from Africa, which so far has benefitted Asia. With a third of
African countries growing at a rate of 6%, it is now getting role models
from a landlocked, crowded countries, which sometimes lack natural
resources. Political leadership that is committed to economic
transformation has been the single factor in sustaining the 10% growth.
Other economies, which not only have good leadership, but also other
strong fundamentals will show even bigger and fast growth. And these
continued successes will have a similar influence in Africa, as it happened in Asia.
From the start of this century, the FDI hotspots in Sub Saharan Africa have been South Africa, Nigeria and
Kenya, but investors both foreign and African are now also looking elsewhere
4
. In particular, there is a
rise in prominence and favor of Uganda, Ghana, Mozambique and Zambia. Moreover, with Morocco,
Egypt, Tunisia and other North African countries struggling to maintain their growth rhythm, West and
East African nations are suddenly emerging as the continents most popular investment zones after South
Africa. One of the bigger shifts which is visible is that capital is increasingly being directed towards
consumer-related markets. Markets which have high population and increasing purchasing power. The
table above shows the growth Africa will see by 2030
5
.
Opportunities in Africa
China is already peaking with low-wage factory of the world and
Africa will soon be the last remaining major low-wage region. The
increase in population (see graph) will only aid in bringing more
cheap and labour intensive work to Africa
6
. Its coast is much closer to
Europe and North America reducing transport cost enormously. In the
coming years, offshoring will start moving from Asia to Africa
7
.
Infrastructure: The middle class in Africa is huge and booming
and is already bigger than Indias. In the next five years, they
will already have a lot of discretionary money, and it will only increase in the next 20 years. The
continent will need a huge boost in infrastructure to cater to the ever increasing needs of its

3
The case for investing in Africa, Mckinsey Quarterly
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http://www.blog.kpmgafrica.com/fdi-favouring-consumer-facing-industry/
5
Lions on the move: The progress and potential of African economies, Mc Kinsey Global Institute, June 2010
6
Seven reasons why Africas time is now, Harvard Business Review by Jonathan Berman
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http://www.africa-do-business.com/
Drivers, Strategies and Business Models for Emerging Markets

populace and industry
8
. Each one of the below will need individual attention from Government
and corporations
9
.
o Roads
o Telecommunication
o Broadband
o Housing
o Electricity
Education: Africa in the next couple of decades will have the worlds largest workforce. Huge
investments will be needed in improving their productivity basic literacy to vocational skills
across the region. Due to investments by Government, enrollments in schools are already showing
a huge jump and more traditional investments in building schools/libraries in rural areas would
prove to be a key success factor.
Trade between African countries: From a traditional model of sending natural resources out of the
region, Africa is starting to do more and more trade within the region. There are new EMNEs
coming from African countries which are using their cultural and geographical affinity to better
use. So, any companies coming in to Africa can also look at doing business within the region and
doesnt necessarily have to look at the region as an offshoring destination.
Agriculture: Apart from a huge collection of natural resources and minerals, the sheer agricultural
land available in Africa is enormous. With better rain water harvesting facilities and use of modern
techniques, Africa could be an agricultural powerhouse.
Mobile communications: From 2% in year 2000 mobile penetration will reach a significant 84% of
the population by 2015. Africa is a huge market for feature rich phones which have basic
telephone functionalities and also help users do other tasks. Mobile phones have been
instrumental in bringing growth and accessibility in certain regions of the continent. Innovative
uses of accessing local price information for crops to receiving weather updates and making
payments are only increasing the potential uses of the device.

Challenges in Africa Expect the Unexpected
A critical question to answer is whether the growth Africa saw is a one-time thing, or is it going to
continue for the next few years.
Unpredictability of political risks: Political shocks are not confined to EMs. Strategic plans of
corporations cannot always account for the contingencies and Africa in particular is exposed to
such shocks. It is imperative that long term plans, need to be adaptable as the risks might open
new opportunities for example, democratization. Managers will constantly need to anticipate
and reposition the firm and funds to gain from changing political scenario.
Role of Private investors in Infrastructure development: Most of the utilities are being provided at
a loss, as the cost of capital and operations are not being covered. This makes it very hard for
private investors to participate in the growth of physical infrastructure. Just as telecom boom
happened due to private investment, infrastructure needs private capital. As infrastructure is key
to developing the economy, Governments need to figure out a way for making this a more
investment friendly option. Companies need to ensure that they dont get stuck in the cycle of
over employment, extra maintenance costs and losses in distribution models.
Strategy development and execution: As companies look at Africa, they need to look at individual
needs of each territory and build product lines and business models accordingly. It is very easy to
fall prey to the notion that due to cultural affinity in various regions, existing businesses would be

8
http://www.frontiermarketnetwork.com/content-page/investment-opportunities
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http://www.howwemadeitinafrica.com/business-opportunities/ http://www.africa-do-business.com/
Drivers, Strategies and Business Models for Emerging Markets

successful. If anything, the more involvement of local people in solving local issues, while driving
the business could be the key to success. This poses a big challenge for corporations as
sometimes they are so complex in their organization, that it is very hard to be agile and adapt
based on new realities.
People: No matter how great the strategy and risk mitigation is the success eventually falls on
people in the country of execution. Organizations have found that genuinely investing in people
will bring significant rewards. At the heart of strategy execution, companies have to realize the
true potential of local talents and develop their skills. Top down approaches need to be relooked
upon and more bottom up approaches which use the local understanding of employees for
execution. This is why all that is being done to improve Education in the continent is so important.
Country level Returns: As countries in the region integrate more, global industry factors would
play an important role in determining the success and failure. For returns though its country
factor which is more important. And because returns in an EM would depend on local factors, the
choice of country would determine a large part of performance.

Introduction to South Asia
South Asia historically, had a long and painful experience with foreign businesses exploiting their market
without contributing to the well-being of the local economy. The British occupation in the region for more
than 200 years resulted in extraction of Natural resources and shipping to all parts of Europe. What is now
understand intimatelyand what other companies who want to sell in South Asia, particularly India, must
recognizeis that developed worlds future is tied to the communities where they operate. A thriving and
sustainable South Asia and especially India, creates thriving and sustainable business opportunities for the
developed world.
Economic growth has accelerated significantly over the last 2 decades, and so too has the spending
capacity of the population. Yet, it remains unknown how the consumer market will evolve in the future.
Will the growth continue especially when Indias growth seems to have slowed down? Will the income
distribution in the countries change? What will people spend money on?
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Companies need to understand this before they make investment decisions about where to locate
factories or R&D hubs. They need to look at tax policies, physical and legal infrastructure, or labor costs in
the particular state theyre considering
11
.

Opportunities in South Asia
Build new business models: There is a huge opportunity to try out new business models in this
region which also accelerates job creation. The manufacturing and construction sectors can play a
crucial role in this. Industry can use innovation at every level and reengineer products which can
bring growth both in short term and long term. The high growth in population can be used both
for involving more people in the business processes, as well as mass consumers, if the product is
something that they need. People should know that companies are not there to just sell to them,
but to buy from them and invest in them as well.

10
http://www.mckinsey.com/insights/asia-pacific/toward_a_uniquely_indian_growth_model


Drivers, Strategies and Business Models for Emerging Markets

Large number of consumers will be in the new to bracket: The region will become the 5
th
biggest
consumer market in the next decade largely due to India
12
. Rising incomes in India alone will lift
291 million people from poverty. Growth will not only come from big cities but it will move
beyond and give organizations a better reach to spending consumers. This will be the right time
for corporations to build brand loyalty amongst the new spenders.
Distribute growth: Create hubs all across the country and not focus too much on few cities as
centers of growth. We need to break infrastructure problems into manageable pieces, developing
hundreds, even thousands of smaller cities around the country where the problems of water,
transit, power, and governance can be negotiated at the local level.
First mover advantage: There are a lot of voids in the marketplace in this region. It is an
opportune time for looking at the voids and building strategies which help plug the gap. This will
help in gaining the advantage of being the only company providing particular services and
products.
Increasing farm productivity: Boosting agricultural infrastructure with investments and bringing
modern technologies to improve market access, rationalize price supports and an overall
streamlining agricultural administration.
Infrastructure: Primarily around

Challenges in South Asia
Companies will need to attract and educate large numbers of consumers. Establish and retain
brand loyalty as taste changes based on increase in income levels. Potentially introduce high
value products and services at sufficiently low prices.
Reforms Governments need to continue liberalizing their economies. Indias reluctance in
allowing FDI in some sectors and not allowing external competition is stifling the industry. Other
countries need to work on their labor laws and reforms in financial systems. Barriers to entry need
to be reduced and more access to marketplace for rural citizens need to arranged.
Investment in Infrastructure and Education A significant portion of Government budget needs
to be invested in improving physical road, electricity - and virtual infrastructure broadband
connectivity. This also would help in developing the education sector and make it accessible for
its growing population.
Enforcing contracts and protecting investors: India is currently ranked as one of the worst
countries for enforcing contracts.
Culture: The region is a cultural hotbed. Its more about building relationships than about figures.
It might be difficult for outsiders to adapt and give due diligence to the country cultural aspects.
Starting a business and getting relevant permits (see graphic below): It takes eternity to get all the
paperwork required for starting up a company. And to add to that certain permits need around 6
months
13
.
Intellectual Property: IP laws are not strictly enforced. Investors must ensure that they take
measures to secure themselves from infringement. Also, care should be exercised while drafting
contracts for sharing copyright materials.
Corruption: Political and regulatory risks pose a big challenge in this region, which also
sometimes leads to corrupt practices and undue delays. Foreign investors especially can face
bureaucratic hassles at both state and national government levels.

12
The Bird of Gold: The Rise of Indias Consumer Market, McKinsey Global Institute, 2007
13
Doing Business in South Asia, 2013, The International Bank for reconstruction and development/ The World
Bank
Drivers, Strategies and Business Models for Emerging Markets

Court proceedings: In places like India, court proceedings can take years. So, corporations need to
be sure whether they want to go to court, or find other amicable ways of resolutions.

Wrap up
If a region manages to strike a balance between its opportunities and challenges, positive growth will just
be a question of when and not if. If the economy continues to grow rapidly, economic and demographic
forces will lead that growth into increased incomes and consumptions.
Companies and Governments need to look at their investments in a broader context, not just capital in
bottling plants and trucks but also human investment in building schools in the neighborhood and
training people from the locality, social investment in women entrepreneurs, and technological
investment in innovations that can power a water cooler, a mobile phone, or a solar lantern by which a
young boy or girl can study.
It seems that both South Asia and Africa is, where the future will be made.











Drivers, Strategies and Business Models for Emerging Markets


Bibliography:
1. Emerging Markets: A review of conceptual frameworks by Dr. Aziz Sunje and Emin Civi
2. Emerging Markets: Prospects and Challenges by Kalpana Kochar, IMF, October 2013
3. Emerging Markets, Emerging Models by Ashish Karamchandani, Michael Kubzansky and Paul
Frandano, March 2009
4. Managerial Agency, Risk, and Strategic Posture: Nonmarket Strategies in Eastern Europe and
Central Asia by Yusaf Akbar and Maciej Kisilowski
5. The Nature of Institutional Voids in Emerging Markets, Why markets fail and how to make them
work, An Excerpt from Winning in Emerging Markets: A roadmap for Strategy and execution by
Tarun Khanna and Krishna G. Palepu
6. New Business Models in Emerging Markets, Harvard Business Review by Matthew J. Eyring, Mark
W. Johnson and Hari Nair
7. Seven Reasons why Africas time is now, Harvard Business Review by Jonathan Berman
8. The Case for Investing in Africa, Mckinsey Quarterly
9. Doing Business in Africa: From Strategy to Execution, Ernst & Young
10. Lions on the move: The progress and potential of African Economies, Mckinsey Global Institute,
June 2010
11. Doing Business 2013: South Asia, The International Bank for Reconstruction and
Development/The World Bank
12. The Bird of Gold: The rise of Indias Consumer Market, Mckinsey Global Institute, May 2007


Special Thanks to Prof. Yusuf Akbar for some great discussions on Emerging Markets and changing
paradigms.