Wednesday, November 28, 2012

The BRICs: A Big Opportunity for Businesses to Fail


Overestimating Emerging Markets
The article “Seven Big Ways to Fail” cites a misjudgment of risk as one of the largest contributing factors to business failure. This principle could also hold true for private expansion into emerging market sectors.

According to the Gallup poll (featured above) American’s overestimate the power of emerging markets in comparison to the United States. This fact could increase the incentive for expansion into these countries, but a fundamental undervaluing of risk alongside a lack of understanding of these markets could prove this business strategy fatal.

The emerging markets are attractive because not only do they often present a large and untapped consumer base for companies, they also present the opportunity to gain comparative advantage.
An article that appeared in Forbes in May titled “What it Takes for Consumer Product Companies to Win in Emerging Markets” lists four developments in emerging markets that could make expansion tricky.


  1. There is consolidation happening quickly and local companies have the advantage.
  2. The emerging middle class has a keen sense of brand recognition
  3.  Traditional trade will exist alongside modern trade scheme
  4. Its difficult to secure quality supplies at good prices

The article concludes:
Leaders will be those that excel at identifying and riding these game-changing developments, even proactively shaping them, tailoring the approach based on whether they are new players or veterans.”

Essentially, those companies that will succeed in these markets will be those that apply the Blue Ocean Strategy: Not only will companies have to navigate the specificities of different markets but they will also have to adapt their products to align with the needs and preferences of the consumers in those markets.

The BRICs are Broken


Here is something else to think about:  The BRIC (Brazil, Russia, India and China) countries often present their own threats to one another, so they shouldn’t be grouped together. The relationship, for example, between Brazil and China could have a detrimental impact on the Brazilian economy as it becomes more deeply tied to the Chinese economy. China has surpassed the US as Brazil’s largest trading power and their demand for certain resources has caused significant asymmetry in the Brazilian market. The global economic crisis has slowed the purchasing of Brazilian exports by China having an adverse effect on the Brazilian economy. At the same time, Russia and Brazil compete for the same energy market, which drives up prices and causes India, a high energy consumer to suffer.





Investment in the BRICs

According to John-Paul Smith, emerging markets equity strategist at Deutsche Bank: “extent of arbitrary state intervention meant most companies you invest in are there to serve the interests of the broader economy rather than the individual investor.” The BRICs are experiencing lower growth rates than they were before the global economic crisis and investment has gone too far. While the BRICs may have the ability to compete with the US in terms of population and their potential for long-term growth, the BRICs to this point have not matured quite enough to compete.

Conclusions

Taking all this into account, how smart is it for large companies (or even small companies) to base their business strategy around emerging markets?

Sources:

http://www.cnbc.com/id/49015236/BRICs_Are_Investment_Disaster_Now_Uninvestable_Pro
http://www.foreignaffairs.com/articles/138219/ruchir-sharma/broken-brics
http://www.forbes.com/sites/baininsights/2012/05/23/what-it-takes-for-consumer-products-companies-to-win-in-emerging-markets/2/
http://www.reuters.com/article/2010/09/24/us-brazil-economy-china-idUSTRE68N1YB20100924



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