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Marketing Entry Strategies—Learning from Emerging Markets

Just as the internationalization boom of the 1990s proved instructive with regard to market assessment, so there is much to be learned from the marketing strategies adopted at entry by western companies in emerging markets.8 While most attention has been paid to market entry mode questions, such as the choice between a joint venture or a subsidiary, it is notable that most multinationals made the same assumption about their marketing entry strategy—namely, that they would replicate the competitive strategy that had served them well in developed markets, transferring their developed market brands and strategies to emerging economies without adaptation. While an argument can be made for such a replication strategy on the grounds of leveraging competitive assets such as brand names, it can only be made by ignoring the fundamental tenet of marketing, which is that companies should responsively adapt their offerings in the face of different market conditions. The result in most cases has been an unprofitable niche position, in which MNCs compete with each other for the business of the small elite who value their brands and can afford their prices. That this position is the wrong one for multinationals is evidenced by their subsequent struggles, many aspects of which flow directly from this marketing approach. The surprisingly rapid growth of local brands, many of which imitate their global competitors, demonstrates that distribution, for example, is an achievable goal when it is part of an integrated market-driven approach. The fierce competition among multinationals is also indicative of “me-too” niche marketing strategies driven by replication rather than local market responsiveness, and it is evidence of a flawed execution of the original market entry strategy (to judge from the MNCs’ declared objectives in entering emerging markets) of market penetration.

To turn around their business in these markets, multinationals must in effect reenter the markets by rethinking their marketing strategy at two levels. First, they must embrace a mass-marketing mindset. While most MNCs have lost the mass-marketing competence that made them huge corporations in the first place (because of the intensified competition and fragmentation that has developed in their home markets), this approach is suitable both for current conditions in emerging markets and for the market penetration objectives behind their market entries. This mindset, which includes the need for aggressive attention to price competitiveness, should be reintroduced as the medium-term goal of the MNCs in emerging markets. Secondly, MNCs must develop dynamic strategies for reaching those mass markets; in effect, market expansion strategies that will take them out of the elite niche.

There are two major reasons why multinationals should adopt a mass-marketing approach in emerging markets. First, it is demanded by the typical emerging market structure. Second, anything else is inconsistent with the rationale behind the entry of multinationals into these markets, which was market penetration that was justified by the high potential of large and/or economically undeveloped populations. The principal reason why these billions of people are described as potential consumers rather than categorized into market segments is that they lack the financial resources to purchase the multinationals’ products. The affordability gap will only be bridged when companies reach down to them by offering products at affordable prices; it will not be realized by emerging market populations increasing wealth to the point at which they trade up to the products currently on offer.

In practice, however, most multinationals did not develop localized products as part of their entry strategy, instead preferring to transplant offerings from their traditional developed markets. Even disregarding the question of whether the product met local needs, this is a niche strategy because of the price position that such products inevitably occupy. Keen to maintain a degree of global price consistency and unable to lower the price much because of the threat of parallel importing, these transplanted products end up being priced at points at which only 3–5 percent of the population can afford them. It is this niche strategy that has given local competitors the space to develop their own competence and brands far more quickly than multinationals had anticipated. It also fitted well with the niche distribution strategy adopted by most multinationals, which tend to rely on larger channels with which they are somewhat familiar and which cannot realistically achieve high distribution coverage of the traditional, complex, socially embedded channels characteristic of emerging markets.

In short, multinationals were pursuing marketing strategies that were fundamentally inconsistent with their declared objective of entering emerging markets to realize the mass-market potentials of their huge populations. This is particularly ironic for that large number of multinationals that trace their own historical roots to the development of mass marketing in North America and Western Europe in the early and mid-twentieth century. While it might be argued that, given a long enough time frame, this potential will be realized, the only circumstances in which this justifies such early entry is when first-mover advantage can be obtained.

Mass marketing, as explained by business historian Richard Tedlow, began with the “breakthrough idea” of “profit through volume.”9 The alternative business paradigm, that of keeping prices and margins high, was dominant in the era preceding mass marketing and is increasingly a hallmark of the “era of segmentation,” which characterizes most developed markets now. In these developed markets, marketing strategies begin with breaking down demand into well-defined segments and developing brands and products narrowly targeted at those segments—almost the complete opposite of mass marketing. By contrast, mass marketing was built around good but simple products, narrow product ranges, and low rates of product obsolescence.

Contrast these two marketing paradigms, and it is easy to understand why the multinationals failed to adopt a mass-marketing approach—not only had they lost the required skills, but they were actively attempting to move in the other direction, adapting their marketing approaches towards the “segment of one” era that technology promises in developed markets. Speak to executives in these multinationals, however, and it becomes clear that the entry strategies that they followed were by choice rather than forgetfulness. In many cases, they argue, mass marketing is not yet possible in most emerging markets because the marketing infrastructure on which such strategies depend, especially distribution systems, are not yet sufficiently developed. Casting the issue as a “chicken-and-egg” problem in this way is a blinkered approach for two reasons. First, Tedlow demonstrates that mass marketing was not an inevitable product of technological advances in manufacturing or distribution. Instead, it was stimulated by the vision of a set of entrepreneurs (such as Henry Ford) who sought to “democratize consumption” and reap the first-mover benefits of building scale in operations and customer franchise. This suggests that the multinationals’ niche marketing strategies represent a strategic failure rather than a market failure. Second, there are companies managing to penetrate the mass market.

The case of Kellogg, the U.S. cereals giant, demonstrates that it is not only local competitors who can sense the need for mass marketing and deliver it. Kellogg, lured by the prospect of a billion breakfast eaters, ventured into India in the mid-1990s. Like many of its counterparts, Kellogg’s market entry strategy proved unsuccessful, and, after three years in the market, sales stood at an unimpressive $10 million. Indian consumers were not sold on breakfast cereals. Most consumers either prepared breakfast from scratch every morning or grabbed some biscuits with tea at a roadside tea stall. Advertising positions common in the west, such as the convenience of breakfast cereal, did not resonate with the mass market. Segments of the market that did find the convenience positioning appealing were unable to afford the international prices of Kellogg’s brands. Disappointing results led the company to reexamine its approach. Eventually, Kellogg realigned its marketing to suit local market conditions: the company introduced a range of breakfast biscuits under the Chocos brand name. Priced at Rs. 5 (10 U.S. cents) for a 50-gram pack (and with extensive distribution coverage that includes roadside tea stalls), they are targeted at the mass market and are expected to generate large sales volumes. Other emerging market veterans such as Unilever, Colgate Palmolive, and South African Breweries have amply demonstrated the viability of mass markets in emerging economies and the benefits of rapidly transferring knowledge gained in one emerging market to others.

Another argument articulated by some multinationals is that emerging market consumers are rapidly becoming more like their affluent market counterparts, and that it is therefore sensible to offer globally standardized products and wait for the consumer to evolve towards a preference for these. This convergence argument may or may not be true, but it is certain that the rate of change is slow; specifically, in most emerging markets, the mass market will remain poor well beyond the current planning horizons of most multinationals. Even as they grow more affluent, it is far from certain that Chinese and Indian consumers’ preferences will converge with those of Europeans or Americans. It is as likely that they may retain idiosyncratic local consumption patterns that are driven by cultural norms. A better strategy for any serious emerging market player is to understand and cater to local consumers’ current needs and evolve with them as they grow more affluent.

There are two general approaches to moving towards mass-market strength that correspond to a fundamental choice that MNCs must make about the basis and nature of competition. On the one hand, MNCs must decide the basis on which they wish to compete in emerging markets. They can do so by either transferring their global assets, such as brand names of proven strength in other countries, or by developing local (i.e., market-specific) sources of advantage, which include but are not restricted to brand names. In addition, there is the related question of whether to compete against other MNCs or against local competition. These are, of course, interrelated questions, and the strategies are not mutually exclusive. Nevertheless, they represent quite different uses of marketing resources, and they will thus be manifested in distinctive marketing strategies.

The choices made by most MNCs until now are clear. For the most part, they have chosen to leverage their global assets, including brands, managers, and suppliers of marketing services, in the belief that these represented their sources of competitive advantage and that they would be valued in emerging market economies. In theory, this is a justifiable entry strategy if the MNC accepts the consequent restrictions on market size. In practice, this has led to overcompetition and rapid saturation of the wealthy segment of emerging market populations, principally because of the number of MNCs that entered these markets in a short period. In effect, this approach assumes that the advantages possessed by these companies are the output of previous marketing executives (e.g., established brands) rather than the ability of the current marketing executives to adapt the corporations’ marketing assets and programs to new markets. This overconservative approach represents a failure to commit to the new emerging markets.

There are two principal routes of localization. The first is based upon the use of global sources of advantage, but it involves the MNC adapting its marketing mix to make that global asset more suited to local emerging market conditions. For example, an MNC might transfer an established global brand into an emerging market but change its packaging size, price points, or even its product formulation to enhance its attraction to the emerging market retailer and consumer. (Kellogg’s approach in India is an example of this degree of localization.) It is important to note that this strategy does leverage the MNC’s global assets (i.e., it is not based upon marketing derived ground-up from analysis of the local market). However, it is more than simply exporting a global brand via a local distributor—the necessary adaptation requires investment. Importantly, this strategy also brings the MNC into competition with local players.

An alternative strategy is to develop new market-specific resources, a more direct but more costly and probably a slower approach than adaptation. This strategy is starting to be seen in the form of a number of MNCs acquiring local brands that are added to their portfolio alongside global counterparts. In Japan, for example, Coca-Cola carries a number of locally-oriented brands, such as Georgia iced coffee, that enable it simultaneously to meet local taste segments and to derive greater economies of scope from its sales and distribution investments in the country. Alternative local resources that might be developed are distribution assets, such as company-specific warehouses or fleets of vans or even bicycles. P&G took this approach in certain Eastern European markets. In these former communist states, the distribution systems were not simply undeveloped—they had completely collapsed. Recognizing that intensive distribution was an enabling condition for the development of their consumer goods business, P&G invested substantial sums in developing its own distribution network. It did so by funding distributor businesses in the form of vans, information technology, working capital, and extensive training.10 This model, known within the company as the “McVan Model,” produced a significant competitive advantage over both international and local competition; in Russia, for example, the development of 32 regional distributors, with 68 further subdistributors, resulted in P&G having distribution coverage of some 80 percent of the population at a time when most multinationals were still restricted to marketing in the two main cities of Moscow and St. Petersburg. This bold approach illustrates perfectly the trade-off between control and risk—considerable investment was required to develop this network in a country renowned as a distribution challenge (being the largest country in the world in terms of area), but by tackling the issue head-on rather than waiting for the enabling condition to develop, P&G gained huge leads in market share in many categories. While this advantage has continued in some countries, the financial commitment makes P&G far more vulnerable to economic shocks, such as the Russian financial crisis of the summer of 1998.

In summary, recent experiences in emerging markets strongly suggest that replication strategies, typically executed with low-risk forms of market participation, result in market skimming rather than true market penetration and development. This has been particularly ironic because market entry was undertaken ostensibly to develop high-volume businesses in these high-population countries. In practice, it seems likely that, over the long run, multinationals will follow the established template for internationalization by gradually increasing their involvement in the market and the extent to which they adapt their marketing programs to local consumer tastes.

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