How multinationals can organize to win in emerging markets?

The Shift of New Business Models

     The purchasing power parity (PPP) is an economic theory used to compare the real value of the two currencies. In general, purchasing power parity used GDP to measure the spending power in the macro environment to compare with countries. Moreover, it also used to compare the spending power of two currencies against the basket of goods such as a can of coke, a BigMac, iPhone or other consumer goods. There are two important function of the use of purchasing power parity exchange rate. Firstly, it can useful to make comparison between countries. Purchasing power parity helps to identify the price differences of physical goods in different countries. Secondly, there is correlation between exchange rate and PPP exchange rate because exchange rate tends to follow the PPP exchange rate. From the top ten countries ranked in the list, four of them (China, India, Russia and Brazil) are from the emerging markets. Therefore, there are great potential opportunities for multinationals to operate business in emerging economies: “There’s a correlation between high brand value and presence in fast growing markets. Presence doesn’t assure high brand value, but absence makes high value much more difficult to achieve in some categories. Being well represented in fast growing markets helps brands not only by driving sales, but also by influencing higher assessments of forward-looking earnings, which can lift share prices. The full impact requires being present, relevant and well differentiated” (Brown, 2013). 

     The BRIC refers to the countries of Brazil, Russia, India and China, which they became a substantial crucial driver of the world economy that stated by Jim O’Neill, the former Goldman Sachs economist in 2003. This indicant the shift of economic powerhouse from developed economies towards the BRIC. In fact, after 10 year this idea has been said the economies of BRIC still persistently growing and some sources suggest that by 2027 it will take over G7 economies (Wikipedia, 2014). Hence, some critic argues that it might take much longer that assumedly by 2050 for the BRIC combined economies to take over to be the richest countries of the world. The BRICS all together contain of almost 3 billion people, with a combined nominal GDP of US$16.039 trillion and combined foreign reserves combined of US$4 trillion (Wikipedia, 2014). The statistic below shows the ten largest economies in the world from 2010 to 2050 measured by the growth of GDP, which in the near future China will overtake US to become the most GDP earning country. 

BRIC Counties’ Path to 2050 

Some Key Indicators and Statistics for BRIC

The Shift of New Business Models in Emerging Markets

        Up to now, assumedly 20,000 multinationals are running in emerging economies especially in China, Russia, Brazil and India. From the below survey responses reveal that multinationals are expected to gain 78% market share in emerging economies. Most of the multinationals just simply directly import their domestic goods into the emerging markets. This provides advantages because multinationals can use lower-cost labor to slash the margin, repacking the package into smaller sizes and even manufacture products locally. Perhaps there is situation that multinationals only confine themselves in higher-income tiers because emerging markets aren’t creating enough sufficient returns to them. To exploit these markets, companies must develop a new business model. It is important for multinationals to discover the unmet needs for customer in order to satisfy them.

In the following video, Matt Eyring, the President of Innosight consultant firm, explained why disruptive innovation in developing markets needs to rethink its new business models. Multinationals who think they change their business models in emerging market they actually haven’t change it, they just tweak around the edges. Erying mentioned that multinationals only use cutting cost as a value to sale, instead multinationals should build from ground up and re-thinking the fundamental value proposition from customer perspective. He thinks that it is important to fulfill the unmet needs for the emerging markets by changing it business model R&D. Also he reveals that affordable luxury is missing from the emerging middle class. For further information please watch the video. 

Higher-Income Segment of Emerging Markets

        The successful business model in the developed country can wholly re-appear in emerging markets without changing profit formulas and operating models (Eyring & Johnson, 2011). Multinationals can take the advantage to develop the products at low costs and high margins by economic of scale and reduction of variable costs. Higher income segment is willing to spend more disposable money on luxury goods to enhance their social status, recognition and prestige. 

       Thanks to BRIC markets, the luxury good has been double-digit growth even during the time of the economic crisis and it is still continually growing in the future. In the emerging markets customer perceive luxury goods not only the product can provide the product value itself, it also provide difference value of benefits. Since the economic is rapidly growing and the important of quality of life for emerging markets, customers seek for quality, authenticity, brand recognition and fascinate elements of the luxury brands. China is a good example that they consume lots of luxury goods, “China is the star luxury goods market with sales consistently outperforming the global market” (Doran, 2012). According to McKinsey & Company the diagram below, China’s very wealth and wealth class are projected to be account for 70 percent of the luxury goods in 2015.  

       Therefore, it is important for some multinationals to differentiate by providing prominent quality products and services. 

Middle-Income Segment of Emerging Markets

      In emerging markets, the majority of population comes from middle to low income. The middle-income segment has more potentials as they have higher purchasing power than low-income. The middle class in the BRIC has great potential growth and it cans growth as much as fourfold in the next decade. Targeting this segment can generate high sales volume due to the large population. The strategy to capture middle-income customers is different from the high-income‘s by focusing to compete on price as those people cannot afford goods with high price. That why affordable luxury brands are booming to target the middle class. The strong purchasing power just discussed from the PPP and the diffusion of wide penetration of middle class has brought them into affordable luxury goods. Affordable luxury goods not only provide middle class prestige value, it also provides them a stepping stone toward upward social mobility. For example, some luxury brands like Jimmy Choo, Mulberry, Burberry, Ralph Lauren and Michael Kors have already repositioned itself to tap into the demand for the cash-rich middle class (Just-style, 2012). 

     An interesting case from ‘How to Win in Emerging Market: Lessons from Japan’ it talked about how Japan powerhouse companies switch it target segments to middle and low-end when they enter to emerging markets. Many of the Japan’s multinationals have underestimated the rate of growth in the emerging economies. Indeed many of the foreign multinationals already response quickly to these shifts; however, Japan’s multinationals are reluctant and not keen enough for the change. The four major problems that cause the hesitation are: distaste for the middle and low-end segments of the market, aversion to mergers and acquisitions, reluctance to commit financially and organizationally, and a failure to properly allocate talent (Ichii & Hattori). Japan’s multinationals resolve this problems by went after the middle market, actively pursued acquisitions and partnerships in emerging markets, develop products tailored to local market and create strong local management teams. 

    Therefore, the multinationals should find out the unmet needs of consumers by conducting detailed observation of middle-income segment.

Key Challenges to Develop New Business Model 

1. Cultural complexity – different cultural traits (Hofstede's cultural dimensions), high vs low context, languages and history

2. Economic disparity – income distribution can be varying in emerging markets

3. Went local by create local adaptation and customer value proposition

4. Hire and train the right staffs locally with expatriate guiding through them

5. Political stability – provide clarifying law protection, transparency, taxation, corruption and personal safety all this will give confident to investors

Transfer Old Mindset to New Mindset

        Company’s mindset has close relations with targeting segments as it determines the business model for creating customer values. According to our class reading ‘The 12 Different Ways for Companies to Innovate’, the dimension of value capture is an important mechanism for multinationals to recapture it value in the emerging markets that “the company can discover untapped revenue streams, develop novel pricing systems and otherwise expand its ability to capture value from interactions with customers and partners” (Sawhney & Wolcott, 2006). Companies with old mindset will focus on product profitability, current sales, brand equity and market share; therefore, these multinationals target high-income segment well using the existing business models by cutting variable costs in emerging countries. In contrast, multinationals with new mindset focus more on long-term elements like customer profitability, customer lifetime values, customer equity and customer equity share, they can target both high-income and middle-income segment well by revamping their business models which satisfy the segment needs specifically; therefore, they work well in both differentiation and pricing strategy. Moreover, it is important for multinationals to manage customer experiences by “redesign customer interactions across all touch points and all moments of contact” (Sawhney & Wolcott, 2006).  Multinationals can target more profitable segments in emerging markets by creating higher customer values in line with changing business models wisely.

References:

Atsmon, Y., Dixit, V. & Wu, C. (2011). Tapping China’s luxury-goods market. Retrieved March 10, 2014 from http://www.mckinsey.com/insights/marketing_sales/tapping_chinas_luxury-goods_market

Brown, M. (2013). Brand value increases across categories. BrandZ TM Top 100 Most Valuable Global Brand 2013.

Doran, S. (2012). A Quick Look at Luxury in the BRICs. Retrieved March 10, 2014 from http://luxurysociety.com/articles/2012/09/a-quick-look-at-luxury-in-the-brics

Eyring, M. J., Johnson, M. W. & Nair, H. (2011). New Business Models in Emerging Markets. Harvard Business Review, 89-95

Global Sherpa (n.d.). Bric Countries – Background, Latest News, Statistics and Original Articles. Retrieved March 10, 2014 from http://www.globalsherpa.org/bric-countries-brics

Ichii, S., Hattori, S. & Michael, D. (2012). How to Win in Emerging Markets: Lessons from Japan. Retrieved March 10, 2014 from http://magsreview.com/harvard-business-review/harvard-business-review-may-1-2012/1610-how-to-win-in-emerging-markets-lessons-from-japan.html

Just-style (2012). Focus: Luxury fashion shifting to the middle ground. Retrieved March 10, 2014 from http://www.mrketplace.com/36398/focus-luxury-fashion-shifting-to-the-middle-ground/

Luxury Society (2012). The Top 50 Most-Searched for Luxury Brands in China. Retrieved March 10, 2014 from http://luxurysociety.com/articles/2012/04/the-top-50-most-searched-for-luxury-brands-in-china

Mall, A., Michael, D. C. & Spivey, L. (2013). Playing to Win in Emerging Markets: Multinational Executive Survey Reveals Gap Between Ambition and Execution. Retrieved March 10, 2014 from https://www.bcgperspectives.com/content/articles/globalization_growth_playing_win_emerging_markets/

Radware, A. (n.d.). China has emerged as a major global consumer of luxury goods. Retrieved March 10, 2014 from http://www.strangeloopnetworks.com/resources/infographics/why-luxury-websites-are-disappointing-chinese-consumers/china-has-emerged-as-a-major-global-consumer-of-luxury-goods/

Rust, R. T., Moorman, C. & Bhalla, G. (2010). Rethinking Marketing. Harvard Business Review.

Sawhney, M., Wolcott, R. & Arroniz, I. (2006). The 12 Different Ways for Companies to Innovate. MIT Sloan Management Review, 47 (3), 75-81.

Wikipedia (2014). BRIC. Retrieved February 10, 2014 from http://en.wikipedia.org/wiki/BRIC

Wikipedia (2014). BRICS. Retrieved February 10, 2014 from

http://en.wikipedia.org/wiki/BRICS

Wikipedia (2014). Purchasing power parity. Retrieved February 10, 2014 from http://en.wikipedia.org/wiki/Purchasing_power_parity