A Blueprint for Forays into Emerging Markets
Bottom Line: Analysts
often discourage risky expansions into developing markets, but three distinct
strategies have been associated with success.
Indeed,
in one recent report, 75 percent of executives surveyed said their companies
were concentrating on developing economies, but a third of them also admitted
their firms don’t possess a clear strategy for high-growth markets. Even the
biggest and most successful multinational firms often don’t have a solid emerging
markets strategy, and stock analysts discourage many from
even attempting one.
However,
according to a new study, companies don’t have to rely on perfect timing —
provided they carefully leverage the strengths of their internal resources
against the local advantages of the target market. In this way,
less-than-favorable contexts can still breed successful ventures into emerging
markets.
The study’s author analyzed the stock market performance of almost
250 U.S. companies in a variety of industries that entered large emerging
markets. He also compared the data to a secondary set of both U.S.-based and
non-U.S.-based companies.
About 52 percent of the companies in the study created value for
their shareholders out of their emerging market ventures. Of these, almost 30
percent leveraged their corporate strengths — their size and industry
experience, for example — to overcome weaknesses in the emerging market, such
as a lack of legal protection for intellectual property rights. Another 40
percent of successful firms took a different route and leaned heavily on
country-specific strengths, such as a vast consumer base, to offset defects in
their corporate setup, such as having a limited product range and an
unfamiliarity with new markets. The final 30 percent struck a balance between
the first two approaches. The trick is for companies to identify weaknesses in
their corporate structure and the local context of the specific market and
realize which strategies they can use to offset these limitations.
To employ the firm-dominant approach,
companies relied more on their internal resources than the particularities of
the target market. In essence, the author writes, these firms allowed their
resources to push them toward investigating new opportunities in far-flung
markets. These companies tended to possess a lot of assets, had the most
industry experience, and held strong positions against their rivals, all
factors that allowed them to absorb higher levels of risk in their ventures.
And although many of their target markets were politically uncertain and offered
little skilled labor, their redeeming qualities — a growing GDP rate and
cultural affinities with the U.S., for example — made the gambit worthwhile.
But not all companies have
the deep pockets and depth of resources to take this approach. Those that used
primarily a location-focused strategy instead sought to
exploit the vagaries of high-quality markets to help compensate for their
relatively modest resources. Many of these companies, typically smaller and
less experienced than those that used the firm-dominant approach, went into
countries such as China and South Korea, which are characterized by open
marketplaces, stringent intellectual property laws, stable governments, plenty
of skilled labor, and high growth potential. These factors enabled smaller
companies to quickly achieve synergies with their existing operations, which
were also more closely aligned to their expansion activities than those run by
their firm-dominant counterparts.
Look at Cessna, for example: The small-airplane manufacturer was
struggling in the wake of the recent recession because of flagging demand,
manufacturing hiccups, and profit losses. The firm jumped at the chance to go
into China, with its relaxed aerospace regulations and new airports built to
accommodate its growing population. Without seeking to significantly alter the
marketplace and by sticking close to its core business model, Cessna preferred
to “glide safely into China,” the author writes.
The third value-creating approach, used by smaller but more
experienced companies, was a hybrid of the first two. This strategy hinges on
achieving a delicate balance between corporate and local strengths. For
example, the PVM Group, an Italian candy and sugar manufacturer that produces
brands such as Mentos, used its experience of entering the Chinese market to
expand into India. By combining its core approach and previous expansion
experience, PVM took advantage of a market newly open to foreign businesses. As
of 2011, the move had racked up more than US$300 million in local sales.
But
there’s plenty of room for improvement. Almost 48 percent of the firms in the
study initially struggled to arrive at the right mix of corporate- and
location-specific conditions, and they put a disproportionate emphasis on one
type of strategy — in turn endangering their otherwise carefully considered
entry into an emerging market. For example, during the early 2000s, computer maker Dell expanded
into Brazil in an attempt to establish a manufacturing base in Latin America.
Basing its plan around low-cost production and a favorable contract with the
local government, Dell experienced a setback when a new political party came
into power. Although the deal eventually went through, the firm’s lack of
foresight about political turmoil made for a turbulent entry into the Brazilian
marketplace.
Thus, the researcher concludes, the success of emerging market
ventures depends on whether a given firm can “astutely pair trade-offs” — part
of the reason that multinationals can flourish in some economies and founder in
others. Timing and global trends also come into play. After the 2011 Fukushima
disaster, for example, German engineering firm Siemens pulled out of a new
joint venture with the Russian nuclear sector.
And using the right strategy to enter an emerging market
definitely pays off. Companies increased their shareholder value by an average
of between $7 million (by using the hybrid plan) and $23 million (by employing
the location-specific strategy). On the other hand, firms that ignored the
importance of attaining the right fit between their corporate competencies and
country-specific factors destroyed an average of $17 million in shareholder
value.
Source: “A Primer for
Competing Successfully in Emerging Markets,” by
Hemant Merchant (University of South Florida–St. Petersburg), Emerging
Economy Studies, May 2015, vol. 1, no. 1
Matt
Palmquist
http://www.strategy-business.com/blog/A-Blueprint-for-Forays-into-Emerging-Markets?gko=eebc8
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