Wednesday, December 7, 2011

Shifting Strategies for Emerging Markets

The Khana, Palepu, and Sinha article “ Strategies That Fit Emerging Markets,” thoroughly discusses the failures and successes of various multinational companies in emerging markets and delineates the impediments that have rendered many companies unsuccessful. The absence of specialized intermediaries, regulatory systems, and contract enforcing mechanisms in

emerging markets are party responsible for the blatant failure of various implementation strategies. Companies in developing countries usually neglect the “ soft” sides of management that also play an instrumental role in a company’s success, and one of the more crucial shortcomings has been that multinati

onal cannot find reliable research firms to accurately assess consumer preferences, that products and services may be tailored to best suit a specific population. Due to the paucity of firms that can provide institutional support and adequate management, multinational companies have fared especially poorly in developing countries, and, as a result, companies hesitate to invest in developing countries. In direct response to the shortcomings of investing in emerging economies, the Harvard Business Review study holds that while multinational companies have to adapt certain aspects of their strategy to adapt to the various voids in foreign countries’ input mar

kets, product markets, or sometimes both. Multinationals, must, however, also retain the core business propositions that lie at the core of the company’s business models.

When companies tailor strategies to

the specific country’s context, they are able to capitalize on the strengths of particular regions as well as appeal to a certain type of consumer. Accordingly, it’s imperative that multinational companies do so also keeping in mind relevant changes to strategy ( mainly centered around coordination). The main question that arises in emerging markets is whether or not companies can profit even in the face of institutional voids. The study holds that they can because those same voids existed in Western economies before the industry took the requisite steps to address those inefficiencies. The study suggests three strategies to ensure the viability and profitability of multinationals deciding whether or not to enter an emerging market: 1) adapting strategies to fit the specific c

ontexts; 2) Changing contexts to suit the respective population’s preferences ( Hong Kong cable coming to India); and 3) staying away from

opportunities abroad that may be more trouble than they are worth ( Home Depot deciding to provide services to an exclusiv

ely American market).

Should a company decide that entering an emerging market is viable and profitable, how local should the strategy become? We have established that certain features of the strategy have to change in order to address the institutional voids that have impeded success in the past. Seven emerging economies--China, India, Mexico, Turkey, Indonesia, Russia, and Brazil will contrib

ute approximately 45 percent of global GDP and it’s imperative that multinationals’ strategy exploit the profits to be made in these emerging economies. Part of the new strategy needs to be to focus on the specific needs of different cities instead of tailoring products and services to the capital cities alone. Strategies that are designed with this understanding of variability help companies lead the pack and reduce their opportunity cost. For example, in Brazil, multinational companies tend to focus solely on cosmopolitan Sao Paulo and miss opportunities in northern Brazil where the economy is growing much faster, competition is lighter and the prices for common goods are much higher. The northern region is widely considered to be the “ new growth frontier,” yet it’s only very recently that multinationals have shifted their focus from Sao Paulo alone. As per the Brazil example, as emerging markets become more diverse and more competitive in the global economy, multinational companies will need to understand such variance and concentrate on new strategies to exploit promising submarkets. In order to address these concerns, multinationals have developed the “ city cluster” approach which targets groups of relatively homogenous and fast-growing cities/towns in China and Brazil, and in India, where urbanization is still “ gaining steam,” the goal is to gain substantial market coverage in the most cost-effective way. While there is no homogenous strategy for capturing consumer growth in emerging markets, the traditional multinational strategies to focus on the country-level will miss the mark and the gains to be made in smaller clusters. Companies who think about the smaller level will have a better chance of succeeding than those who refuse to change their strategy.

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