That China and India are fueling the global economy with its more than 3 billion consumer market and thriving national economies is well acknowledged. Equally well acknowledged is the quest of many global companies to gain a substantial market presence in these economies in order to grow and be competitive in the new business landscape, as can be evidenced by the ever growing foreign direct investment into both these countries and the number of global companies entering these markets.
Not so apparent is the gradual emergence of local powerhouses that have managed not only to challenge the market leaders that invariably tends to be global brands but also to usher in new ways of competing that are challenging the well established competitive routines of the mighty incumbents. The increasing salience and relevance of the bottom of the pyramid (BOP) market in emerging economies is actively providing hitherto non-existent opportunities for companies to capitalize.
Local companies in emerging markets are leveraging their knowledge of the market, customer mindsets and access to local human, social and intellectual capital to bring to market products and services that not only compete head on with market leading brands but also that have managed to grab market share from the incumbents. Given their geographical proximity combined with their insider status allows for these local companies to edge out global competitors quite aggressively in a gradual but steady manner.
Two examples will drive home the point. Baidu.com is the leading search engine in China. Buoyed by an initial investment by Google in 1999, Baidu.com has perfected the art of attracting Chinese users and offering them services that even Google is finding difficult to compete against. Baidu.com has not only outsmarted Google in its own game of online search but has also managed to build substantial relationships with all the key stakeholders such as the regulatory authorities who play a substantial role, intermediaries and customers in the Chinese market to ensure its long term status of leader of the Chinese online search market.
A second example is that of Micromax, a rapidly emerging mobile phone company in India. Micromax, founded in 1991 has been successful in grabbing market share from the market leader Nokia by customizing its phones to the different rural markets it targets. Unlike Nokia, the global behemoth with established routines, norms and infrastructure that can constrain potential changes to its global and local strategies, Micromax, with its small size, lack of entrenched routines, and a driving spirit characteristic of entrepreneurial ventures, has been able to sell 1 million phones each month and capture 4% of the Indian mobile phone market. And not surprisingly, its market share has come at the cost of Nokia’s presence in those very markets.
There are many such examples of local companies outcompeting global players in countries such as Brazil, Russia, Thailand, Philippines and others. Global companies once thought of as unassailable with their enormous resource base, portable experience of operating in multiple global markets, and networks with stakeholder capable of erecting barriers to entry for other players are now being challenged by local players that lack all or most of those strategic capabilities.
This begs the obvious question: how to achieve sustainable competitive advantage in emerging economies? Or even, is competitive advantage transitory at best and non-existent at worst in emerging economy markets? And finally, can local companies really challenge these global behemoths in the long run or these examples just minor triumphs that are random at best and transitory at worst?
The above two examples are from very different industries. Online searching deals considerably with providing minimal and basic utility to customers by offering technological features that can ease the process of search on the Internet. In other words, online search is a utilitarian or functional category. Mobile phones on the other hand are as much about functional value as they are about the symbolic signaling. Given the wide array of features that can be offered in any mobile phone, companies can help customers signal their identity and personality through the phones they associate themselves with. Despite such differences, local companies have been able to tackle the global brand equity of market leaders, hitherto thought of as the one of the surest ingredients to sustaining competitive advantage.
This article offers four steps that companies are being forced to implement in order to attain and sustain competitive advantage in emerging economies because of the significantly different demands of the customers and the substantially diverse composition of the market that is termed the bottom of the pyramid. Companies will have to follow a four pronged strategy:
1.Connect with customers on the ground
2.Customize strategically for each customer segment
3.Co-opt with local innovators to preempt disruptive innovation
4.Collaborate with the bottom of the pyramid stakeholders
Connect with customers on the ground: Unlike established customer preferences in many of the mature markets of the West, emerging economies are characterized by many first time customers who have only recently managed enough disposable income to purchase products. As such, their needs are evolving. Companies would fare very well by establishing a strong ground network to understand the unique needs of customers and be able to offer such products to them.
Unlike the brand communities of Harley Davidson or The Jeep, wherein these companies organize huge customer centered gathering to understand the customers, brands in emerging economies will have to scale down their interactions and focus on gaining enough market intelligence by acting within the externally imposed constraints.
Customize strategically for each customer segment: As mentioned earlier, a defining characteristic of the BOP segments is the diversity of customer demographics, purchase preferences and basic needs that are salient. As such, standardized products in any category would not enable companies to successfully reach the customers. Effective and strategic customization holds the key to establishing a competitive advantage in emerging market economies.
Contingent of the kind of product or service being offered, companies should strive to customize them for each segment they are targeting. Some brands have exemplified such an approach. The phenomenon of micro financing started to address such needs. Prevalent in many emerging economies micro financing schemes lends small loans to customers at very low interest rates and very negligible collateral evidence. Although huge multinational banks would like to tap into such schemes, their inability to operate at such small scale by customizing their products does not allow them.
Many major global brands such as Nokia, Unilever, P&G, Hyundai and others have recognized such a major shift in strategy that is needed to effectively compete with the many local players. It will be interesting to see whether such shifts will be transitory or enduring given the changing nature of BOP segments.
Co-opt with local innovators to preempt disruptive innovation: Probably the biggest threat to establishing a competitive advantage in emerging economies is the disruptive innovation by the many local startups. These start ups have the dual advantage of having an insider, first hand access to these markets and customers on the one hand, and the cost advantage of innovating in emerging markets on the other.
An aggressive strategy for companies to adopt would be to co-opt with these startups to not only preempt such disruptive innovative products and services but also to strategically partner with them to jointly reap the potential benefits out of such innovations.
Collaborate with the bottom of the pyramid (BOP) stakeholders: One of the most distinctive characteristics of emerging markets is the enormous untapped and underserved market at the bottom of the pyramid. Given the dual challenges of poverty and lack of infrastructure, billions of people that comprise the BOP segment have distinct needs. For example, these customers prefer smaller offerings of products for much lesser prices than the standard sizes offered by brands. Or for example, these customers may be content with minimal features rather than the whole host of up-to-date features.
By not knowing such unique customer demands, brands may lose out on valuable opportunity. Such a situation is further complicated by the lack of infrastructure that includes established networks for information flow, collection of market research data and a comprehensive understanding of these customers. Therefore, brands would benefit by actively collaborating with the BOP stakeholders from local power players, intermediaries and potential customers.
Emerging market economies are challenging given their unique composition. With increasing competition in such landscapes, it is very important that companies understand the idiosyncratic nature of these markets to attain and sustain competitive advantage. Furthermore, it is imperative that the inherent diversities in markets, segments, customer tastes and buying patterns be considered in a comprehensive manner in order to devise effective strategies to tap into and serve these markets.
Companies would do good by not imposing their standardized models and product offerings onto these markets. Instead, by following the three steps suggested in this article, companies can modify their strategies to suit these markets and not only compete effectively with the local players that seem to dominate such markets but also build a strong foundation to create and sustain competitive advantage.
Print ed: 11/10