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📄 Contents

  1. The 86 Percent Opportunity
  2. Opportunities at Many Levels
  3. Characteristics of Emerging Markets and the Opportunities They Create
  4. Finding Solutions
  5. The 86 Percent Solution
  6. Notes
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Characteristics of Emerging Markets and the Opportunities They Create

Each of the specific differences in developing markets presents challenges for companies entering these markets but also creates opportunities for companies with the right solutions.

Characteristic #1: Markets and Culture Are Demanding

Dust and heat, lack of electricity, narrow highways, and low budgets all place strains on products in the developing world. While companies might be tempted to produce second-rate products for the developing world, consumers are very demanding, expecting high value for their scarce cash. Products and services also have to be adapted to local cultures and traditions, which can be very different from those in the developed world. How do you sell jewelry and clothing in Islamic countries, which do not allow you to show women’s faces? How do you sell food and beauty products to a market that is concerned about their being halal? Customers in these markets also have not yet developed a culture of consumerism. They don’t know how to be customers, so strategies used in developed markets, such as money-back guarantees, can have unexpected effects. The memsahib (Indian housewife) and other social networks can have a major impact on the growth of products, brands, and markets.

Opportunity: By adapting to different cultures, rugged environments, and demanding price-performance targets, companies can develop breakthrough designs for product and service offerings. Sometimes these solutions may look more like a motorized "bullock cart" than a traditional automobile. From meeting the demand for halal foods to offering Islamic banking services and cell phones that point the way to Mecca, companies can reach a Muslim market that accounts for one in five customers in developing markets. How do you need to modify or create products and services designed for the local conditions of developing markets? How can you build consumerism and use social networks to build markets for your products?

Characteristic #2: There Are High Rates of Emigration to the Developed World

The developing world is exporting not only products and services to the developed world, but also people. The foreign-born population in the U.S. rose to 31 million people in the last census in 2000, up 57 percent from 1990. These immigrants are in touch with family and friends back home. Globally, immigrants sent home an estimated $93 billion in 2003, second only to foreign direct investment as the largest financial flow from the developed to the developing world. While immigrants are formally a part of developed markets, they are part of something much bigger. These global diasporas are redefining the borders of markets and creating social networks that stretch across the developed and developing world.

Opportunity: By understanding the global social networks of immigrants and their friends and family back home, companies can draw on the resources of the developed world to meet the needs of end users in the developing world. Companies can develop "bank shots" to sell products that are paid for in the U.S. but delivered to relatives in Mexico or India. Companies also can serve immigrants abroad and create services to weave together the far-flung networks of this "ricochet economy." How can you build businesses across these global social networks?

Characteristic #3: Markets Are Fragmented

Developing markets are highly fragmented, with few national brands that have a commanding presence. For example, beer companies initially saw China as a huge monolithic market waiting to be tapped with their global megabrands. After the first push failed, however, it became clear that this market would be won one local market at a time. Local beers were thriving, and large companies began to acquire them. In the words of Wai Kee Tan, vice president for corporate affairs in Asia for Belgian-based Interbrew SA, "China is a nation, but not a national market."6 MTV and HSBC have succeeded by making their global brands local, market by market around the world. Branding strategies and portfolios need to be tailored to the reality of fragmented, market-stall economies.

Opportunity: By developing or acquiring strong local brands and tailoring global brands to local markets, companies can tap into the power of regional communities. They can leverage their global brands and capture the imagination of the local market. What is the right balance of global and local brands needed to connect with the market?

Characteristic #4: Populations Are Youthful and Growing

While Japan, Europe, and the U.S. are worried about pensions and the rapid aging of their populations, emerging economies are young. Peter Drucker has declared that the "youth market is over,"7 but in the developing world, the youth market is just beginning. While only 21 percent of the U.S. population is under the age of 14, this figure is 33 percent in India, 29 percent in Brazil, and 33 percent in Iran (and remember, these percentages are on a much larger population base). Most of the world’s population growth will take place in developing countries.

Opportunity: A young population creates markets for education, games, entertainment, apparel, fast foods, cafes, fashion, magazines and books, beauty products, music, and other products and services. While young people are globally attuned, the youth in developing markets can be different from those in the developed world, and companies need to be aware of the pushback from tradition. By thinking young, companies can connect with these burgeoning youth markets. How can you create the offerings and positioning to reach these youthful markets?

Characteristic #5: There Is Limited Income and Space

Incomes and cash flows in the developing world are much lower. In rural and poor segments, low income limits purchases. But even in more affluent sectors, there is a tendency to limit purchase size. In environments of past or present scarcity, cash is kept liquid rather than being tied up in household inventory. Saving rates in China and nine other rapidly developing countries climbed from 20 percent to 34 percent between the early 1970s and early 1990s, at the same time that savings in industrialized countries fell. While consumers are buying "super size" or "economy size" in the developed world, sachets of shampoo and other products are accounting for billions of dollars of revenue in the developing world. In the developed world, customers pay a premium for convenience. In the developing world, customers buy small for different reasons. Homes are much smaller, so furnishings and other products need to be scaled accordingly. India, with 342 people per square kilometer, is more than 11 times as densely populated as the U.S. (31), and China is more than four and a half times as densely populated (135).

Opportunity: By reducing package size, offering small payments, using demand pooling, and tailoring products to small spaces, companies can build billion-dollar markets a few pennies at a time. Like the just-in-time inventory systems of Toyota or Dell, companies need to design systems to help consumers fill their "just-in-time pantries." How can you grow a large business by thinking small payments, packages, and products?

Characteristic #6: Infrastructure Is Weak

Most of the rural population of the 86 percent markets is inaccessible by motor vehicles, and they lack good sanitation and electricity. At the same time, the cities are growing very rapidly, and this fast urbanization has placed tremendous strains on the urban infrastructure. Infrastructure everywhere in the developing world is fragile or underdeveloped. Transportation networks are nonexistent. Power failures are frequent. Clean water and sanitation are often lacking. Underdeveloped economic systems and restrictive regulations have created thriving informal or parallel economies in developing nations. It is estimated that the informal economy accounts for at least 40 percent of the GNP of low-income nations.

Opportunity: The weak infrastructure creates opportunities for companies that can fill the gaps with water purification systems, generators, inverters, and other products. It also creates opportunities for companies that can find ways to work around holes in the infrastructure, such as through ready-to-eat meals that don’t require refrigeration. The informal economy may present opportunities for legitimate businesses. How can you find opportunities in the holes in the infrastructure?

Characteristic #7: Technology Is Underdeveloped

The developed world has had a head start of many decades in land-line telephones, computing, and other technologies. The developed world has had a much longer time to build technology-intensive industries such as pharmaceuticals and biotechnology, with the support of academic institutions and supplier networks. How could developing countries ever hope to compete? Won’t the market for technology be slow to develop in the 86 percent world?

Opportunity: Powerful new technologies can leap across the boundaries of the developing world. Without the constraints of legacy systems, companies have opportunities to create new systems from scratch, often leapfrogging old technology. Technology can spread very rapidly as consumers quickly adopt it without the switching costs of developed-market customers. How you create the technologies, or ride the technologies, to allow your business to leapfrog with the market?

Characteristic #8: Distribution Channels Are Weak

Developing nations have poor distribution systems. In large cities, distribution is often through small, hole-in-the-wall shops such as the paanwalla shops in India, the tiendas de la esquinas in Mexico, and sari-sari stores in the Philippines. A market of 600 million is locked in India’s villages, 42 percent of which have populations of less than 500, with weak connections to the outside world. The lack of media, roadways, and electricity creates seemingly impenetrable barriers. Some villages don’t have retail outlets at all, and some distribution opportunities, such as market days or carnivals, are temporary in nature.

Opportunity: By building distribution or utilizing the existing idiosyncratic systems in the developing world, such as small shops and market days, companies can find ways to "take the market to the people," meeting the diffused and fragmented markets of the developing world where they live. How can you create the distribution networks to reach the dispersed markets of developing countries?

Characteristic #9: Markets Are Changing Rapidly

By definition, the global 86 percent markets are developing. Although it will take decades for these markets to become developed, the certainty is that they will continue to change rapidly. In a year, or even a matter of months, these markets can shift. Look at the rapid emergence of South Korea over the past decade or the growth of India and China. Consumers become upscale. The precise trajectory this development will take will depend on factors such as government regulations, traditional business practices and culture, and companies’ actions. Rising incomes and improved economic conditions will change consumer habits and society itself, creating predictable shifts, such as the increasing empowerment of women, as these markets mature. These markets will present new challenges and opportunities at each stage of their development.

Opportunity: By understanding the complex path to development, companies can evolve their businesses to meet the changing needs of the developing world. They can experiment with new products and business models in one country and export the successes to another, or even to the developed world. Companies also can import successful ideas from the developed world as the 86 percent markets mature. How can you develop your business with the market?

Because of these distinctive characteristics of the 86 percent market, companies often need to employ market solutions that are quite different from those of the developed world, as summarized in Table 1-1. Each characteristic creates market opportunities with the right strategies, as we will examine in more detail in the following chapters.

Table 1-1 Unique Characteristics Create Market Opportunities

Market Characteristic

Strategy for Realizing Market Opportunities

Markets, culture, and environments are demanding.

Don’t build a car when you need a bullock cart.

There are high rates of emigration to the developed world.

Aim for the "ricochet economy."

Markets are fragmented.

Connect brands to the market.

Populations are youthful and growing.

Think young.

There is limited income and space.

Grow big by thinking small.

Infrastructure is weak.

Bring your own infrastructure.

Technology is underdeveloped.

Look for the leapfrog.

Distribution channels are weak.

Take the market to the people.

Markets are changing rapidly.

Develop with the market.


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