Tuesday, May 2, 2017

Can fast-growing economies be good opportunities for profit?

One of the largest strategy questions for any established and stable organization in a developed country, is whether or not to expand into new fast-growing markets in developing nations. The authors of the Harvard Business Review article “Strategies that fit emerging markets” from the assigned readings this week make the argument- ‘Fast-growing economies often provide poor soil for profits.’ However, this is not necessarily true.
The assertion of the authors is based upon 5 main factors of the market in the developing country- Political and social systems, openness, product markets, labor markets, and capital markets. Growing up in one of the fastest growing economies and a developing nation – India, I have been fortunate enough to see the five factors mentioned above as opportunities rather than barriers. Let us discuss few of these now in detail.
Political and social systems- While I agree that a less regulated and weakly-established system can act as a barrier to businesses, however, this could also be converted into a great opportunity if the organization can leverage its skills to change the market. A good example is the entry of the Big four audit firms – PWC, Deloitte, Ernst and Young, and KPMG in India. According to an article in the economic times [1], these big four firms are the leading forces in the Indian market. I worked with one of these Big four firms – Deloitte, for two years in India from 2014 to 2016, and I personally saw how the firm along with others have conquered the local market. For instance, the biggest fraud case in the history of the country – The Satyam scandal [2], was handled not by local audit firms but global firms – PWC and Deloitte.
Labor markets- Since the education infrastructure may not be of the same level and there may be lesser data for recruiting talent, finding the right talent may be difficult. On the flip side, the costs of skilled labor are much lesser and this will more than offset the other costs. Typically, hourly wage in the US is 7 times that in India, according to a study done by nationmaster.com [3]. The surplus from the labor costs can be used to build strengths in other areas of weaknesses. However, there will still be other considerations such as to check if the employees can communicate in English.
Another barrier according to the authors of the HBR article mentioned above, is lack of infrastructure, in transport for instance. Lack of proper highways or rail connectivity may be an issue in supply chain. However, a good example of a success story of an organization that was courageous to still step in and then reap the benefit is Amazon. Amazon aggressively expanded in India and is now close to setting up entirely its own logistics network. They had enough reason to stay away from the Indian market due to large differences in logistics infrastructure compared the United States, as the authors of the HBR article suggest. But Amazon was brave enough to venture into this horizon and today they stand the largest online retailer in the country[4].
In conclusion, fast-developing markets in developing nations can be great opportunities to expand and develop- if the organization can strategize by converting the difference in conditions from the developed nations, into strengths, rather than voids or weaknesses.
References:
[3] Comparison in labor rates between US and India- http://www.nationmaster.com/country-info/compare/India/United-States/Labor

[4] Amazon India’s largest online retailer- http://mashable.com/2016/08/23/flipkart-amazon-india/#0.HSTOKZLmqs

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