Overview
Entering an emerging market is not easy. In our experience in teaching this topic, consulting for several multinational corporations around the world, and being a practitioner ourselves, we find that emerging markets are tough to enter. Government interference, backward infrastructure, and a lack of skilled workers require a lot of patience, perseverance, and specialized assistance. Opportunities in the emerging markets come with their own set of challenges. For instance, often lack of education of the workforce translates into thwarted growth being curbed by a lack of a skilled workforce. Other challenges that arise are legal frameworks with regard to trade policies, which may be absent or underdeveloped, or tendencies for political paternalism or blatant interferences, which we see in India and Latin America.
Compare the above to the advanced economies, which, despite the fact that growth has been flat to negative since 2008, continues to supersede emerging markets. When looking at the EU, the 27-member countries allow for labor mobility and a free flow of goods without tariff or nontariff restrictions. Furthermore, the workers in many EU countries are highly educated and have conferred great reputations for their economies. “German engineering” is well known around the world for its high level of quality, the same cannot be said for Indian or Russian engineering.
India has been making progress in opening its economy, but its political response to a much-needed foreign investment is troubling. Large foreign retailers such as IKEA are willing to employ thousands of Indians, but politicians continue to fret about mom-and-pop stores and other small businesses that may be displaced. In 2012, politicians forbade IKEA from selling half its product line in India. In 2012, the deputy chief minister for Punjab went as far as to declare that there was no need for foreign-owned discount retail chains because there are already a multitude of stores selling cheap goods.1
Foreign investors become confused and frustrated with these types of patriarchal decisions such as these. Although many nations have transitioned from autocratic rule to democracies with free markets, some continue to dabble in market interference. Take Argentina as an example, where President Cristina Fernández de Kirchner, to prevent a run on the peso by Argentines, has put strict currency controls in place. It is not wonder that in an annual World Bank study titled Doing Business (2013), New Zealand, Singapore, and Hong Kong ranked first, second, and third place respectively in protecting investors, while Argentina ranks 98.2
Emerging markets such as India and China have huge and growing populations and thus demand rapid growth rate if they are to make any headway in social development. If India’s economic growth falls below six percent the nation would be in crisis, whereas in most advanced economies, such as the United States, if the economy grew at that rate it would risk overheating.
India can barely keep up with educating its rising populations. It needs as many as 1,000 new universities and 35,000 new colleges if it is to achieve its stated goal of raising post-secondary enrollment from 12 percent today to 30 percent by 2020. Meanwhile, Mexico is turning out more engineers and engineering technicians a year than Germany, and it must scramble to ensure they all get jobs. To fail would be to spawn social unrest.
Another key factor when considering entering emerging markets is the distance between emerging markets, which can hamper trade. One study found that a 10 percent increase in distance between north-to-north traders reduces trade by 10 percent; the same distance between south-to-south traders reduces trade by 17 percent.3
An improved policy would make an important difference in resolving such problems but emerging market have yet to demonstrate serious desires for true bilateral cooperation. Although the ASEAN nations have a trade agreement, it has yet to yield much economic improvement, as the bloc has yet to turn their loose organization into a trading block, even though economic integration has been touted as a central pillar.
Public administration in emerging markets has much to be desired. The 2013 Doing Business4 study by the World Bank ranks Brazil, Russia, India, China, and South Africa (BRICS) as 116th, 92nd, 134th, 96th, and 41th respectively out of 189 countries.
Infrastructure remains a significant problem in most emerging markets. China continues to invest heavily in roads, railways, and ports, but elsewhere the progress is weak. India has called for $1 trillion in infrastructure modernization but it lacks the funds to do so independently and its politicians remain suspicious of external sources of capital. The situation is no different in Latin America, in fact, it is arguably worse, as 80 percent of Latin Americans live in cities, compared to fewer than half of Asians. The need for modern urban infrastructure is urgent. Brazil, for instance, wants to improve its infrastructure, which is a bottleneck for the outflow of many of its export products, but it is moving glacially. It has been so slow that Sao Paulo’s underground rapid transit system covers only one-tenth of the distance of the one in Seoul, South Korea.*
Does all this mean that foreign investors should avoid trading with or investing in emerging markets? On the contrary, however, any organized program of opening up to emerging markets must include specialized expertise, on-the-ground knowledge, local partnerships, and, most of all, patience.
Why Multinationals Fail in Emerging Markets
Pacek and Thorniley5 identified an exhaustive range of factors contributing to the failure of companies from advanced economies into emerging markets. These factors may be divided into external and internal factors and almost all are related to strategic and leadership issues:
• Leaders fail to consider emerging markets as an integral part of strategy and acknowledge that such markets need to be approached with a distinct set of criteria for judging progress and success.
• Top leaders fail to commit sufficient resources to get businesses established and growing in emerging markets, or acknowledge that it is never a short-term affair.
• Companies fail to appoint a head manager for emerging markets and often assign this responsibility to an international manager who is responsible for markets in both developed and emerging countries. The problem with this is that operational approaches are distinct in each of these markets.
• Companies fail to understand that business is driven by heads of regions and business units rather than by heads of functional areas. While the former have a focus and appreciation for the emerging markets, the latter tend also to be interested in developed markets.
• Companies do not acknowledge that emerging markets operate under distinct business models and structures, and often merely transfer practices tested in developed markets without considering adaptation.
• The board members of many companies have limited diversity in terms of culture and ethnic background and do not develop sufficient appreciation for the peculiarities of emerging markets.
• Multinationals underestimate the potential and often early competition from smaller international and domestic companies, thus never accepting that they may be destined as a follower in emerging markets.
• Economic and political crisis also exist in emerging markets and have a significant impact on business performance. Top managers need to understand this, be prepared to adapt and introduce new tactics rather than changing strategy, which despite having short-term success, tend to be the wrong approach in the long term.
• Companies get alarmed by short-term slippages and cut costs to attain favorable temporary results, yet this is likely to have a structural impact on strategy implementation and long-term results.
• Companies set unrealistic targets to achieve, which leave managers with limited maneuvering space and short-lived careers.
• Companies fail to recognize that entering the market early is fundamental in establishing networks, developing brands and learning the larger context from which it will operate.
• Senior leaders fail to recognize that developing a network of reliable contacts often requires establishing friendships with locals, which requires time and visibility in emerging markets.
• Companies fail to empower regional and country managers and delegate decision-making power to local managers.
• Foreign companies fail to recognize that emerging markets are more price-sensitive and often stick to their pricing structures instead of adapting to local sensitivities.
• International firms fail to recognize that their product portfolio is not tailored to the lower and middle segments of emergent markets and do not develop innovations that are context-oriented.
• Foreign companies underestimate the competition from local companies in emergent markets. Local companies understand better than anyone about local markets, sometimes employ dubious practices, and often have the support of local governments.
• One of the largest obstacles that foreign companies face may be the unwillingness to change long-standing business practices.
• Another challenge is to appoint senior managers who are not familiar with the local market, culture, and language in emerging countries.
• Multinationals that focus too much on the larger emerging markets, such as BRIC, may neglect smaller markets and miss better-suited opportunities.
• The fact that demand is volatile and unpredictable in emergent markets may discourage multinationals, which often expect reliable market information.
The failure factors are numerous and diverse but as Pacek and Thorniley noted it all boils down to a lack of adequate market entry preparation. Preparation requires companies to continuously research the external environment and know how to use internal resources to take advantage of opportunities. Hence, a preliminary audit that focuses on external and internal factors is essential. The external factors may be examined by posing questions concerning the market, the political environment, the economic environment, and the business environment, as depicted in Table 1.1.
Table 1.1 External factors and sample questions
|
Understanding the market |
|
|
Market potential |
• How large and wealthy is the market? • Is there unsatisfied demand for the product/service? |
|
Understanding local consumers/ customers |
• Who are the consumers/customers? What are their characteristics? • How do consumers make their decisions? |
|
Reaching the consumer/customer |
• How difficult/easy is it to reach potential consumers/customers? • How do competitors and non-competitors reach their customers? |
|
Competition |
• Which competitors are already operating in the market? • How strong are these competitors? |
|
Lessons learned by noncompetitors |
• What do noncompetitors say about the business environment in the country? • What have been the largest obstacles to successful operations? |
|
Local culture |
• What aspects of local culture are relevant to running a successful local business? |
|
Understanding the political and economic environment |
|
|
Economic outlook |
• How sustainable is economic growth? • What is driving economic growth? |
|
Political outlook |
• What is the level of political risk and how will or might affect the business? |
|
Government policies |
• Does the government allow a level playing filed? • Is the government in the hands of local lobbies? |
|
Understanding the business environment |
|
|
Finance |
• Is it possible to finance operations locally? • What access do customers/consumers have to finance? |
|
Labor market |
• What are the wage/salary rates for the employees who will be needed? • What are the most effective ways of recruiting local employees? |
|
Taxation |
• What are the current levels of taxation? • What is the outlook for tax incentives? |
|
Legal environment |
• How effective and efficient is the local judiciary? • Is there any hope that the legal system will improve? |
|
Bureaucratic obstacles to business |
• What are the most common bureaucratic obstacles for business? • How easy or difficult it is to set up business in the country? |
|
Crime and corruption |
• Is crime a problem for business? • What is the level of corruption? |
|
Infrastructure |
• What is the quality of local transport infrastructure? • And telecommunications? |
|
Foreign trade environment |
• Is the country a WTO member? • Does it belong to any trading blocs or regional free-trade areas? |
|
Cost of building a business and brand |
• How expensive is it to build a brand? • How much time will it take to do what is necessary to get the business off the ground? |
By the same token, the internal factors must inquire about resources, products, organization, and risks, as depicted in Table 1.2.
Table 1.2 Internal factors and sample questions
|
Resources |
• How much time and money will be required? • Is the CEO committed to support business development and provide necessary resources? And the senior managers? • What human resources are needed? |
|
Products |
• Is the product portfolio right for the market? • Will investment be available for developing new products? |
|
Organization |
• Will existing internal processes and operational practices help or hinder what is planned? • What existing capabilities can be drawn? |
|
Risks |
• Can the risks that have been identified be managed? • How would entry be financed? |
Having done a preliminary external and internal audit, managers need to prepare a business proposal describing what to do, how to do it, by when, and resources required. Business must then ask themselves whether there are similar or better opportunities available in other emerging markets. How then, can we compare the potential of different emerging markets?
Ranking Emerging Markets
According to the GlobalEdge6 team at the International Business Center (IBC) at The Eli Broad Graduate School of Management, Michigan State University, there are three main reasons why emerging markets are attractive. They are target markets, manufacturing bases, and sourcing destinations.
As target markets they present a growing middle class with substantial demand for consumer products and services. They are also excellent targets for electronics, automobiles, and healthcare services. The textile (machinery) industry in India is huge, oil and gas exploration plays a vital role in Russia, agriculture is a major sector in China, and airplanes are almost everywhere.
As manufacturing bases they present advantages such as low-wages, high quality labor for manufacturing and assembly operations. South Africa is a key source for industrial diamonds; Thailand has become an important manufacturing location for Japanese MNEs such as Sony, Sharp, and Mitsubishi; Malaysia and Taiwan are home to manufacturing of semiconductors by MNEs such Motorola, Intel, and Philips; and in Mexico and China we find platforms for consumer electronics and auto assembly.
As sourcing destinations the emerging markets also are using their advantages to attract MNEs. MNEs have established call centers in Eastern Europe, India, and the Philippines; Dell and IBM outsource certain technological functions to knowledge workers in India; and Brazil is a leading raw material supplier namely in oil and agriculture.
The Emerging Market Potential Index (EMPI) was based on Cavusgil7 indexing approach and developed by the GlobalEdge team to assess the market potential of Emerging Markets. As shown in Table 1.3, EMPI is based on eight dimensions: market size, market growth rate, market intensity, market consumption capacity, commercial infrastructure, economic freedom, market receptivity, and country risk. Each dimension is measured using various indicators and are weighed in determining the overall index. The result is a score on a scale from 1 to 100.
Table 1.3 Market potential index (MPI), 2014
Table 1.3, based on Cavugil, Kiyak, and Yeniyurt8 indicator, is useful in that it provides the relative position of each country but is lacking analysis as it does not provide what the data actually mean, what managers can do with this data.
From Indicators to Institutions
It is common wisdom that size and growth potential are the two best criteria to select an emerging market. Not so for Khanna and Palepu9 who argue that lack of institutions, such as distribution systems, credit cards systems, or data research firms, is the primary factor to consider when entering into an emerging market. For them, the fact that emerging markets have poor institutions, thus, inefficient business operations, present the best business opportunities for companies operating in such dynamic markets. However, the way businesses enter into emerging markets is different, and are contingent upon variations presented by the institutions and the abilities of the firms.
Khanna and Palepu point out that the use of composite indexes to assess the potential of emerging markets, as executives often do, has limited use because these indicators do not capture the soft infrastructures and institutions. These composite indexes are useful in ranking market potential of countries when and only these countries have similar institutional environments. When soft infrastructures differ we must then look at the institutional context in each market. In fact when comparing the composite indexes of the BRIC countries we find that they are similar in terms of competitiveness, governance, and corruption. Yet the key success factors for companies in the BRIC differ significantly from country to country. Take for example the retail chain industry.
In China and Russia retail chain operators, both multinationals and local companies, converge in urban and semi-urban areas. In contrast, in Brazil very few multinational retail chains are located in urban centers, and in India we find even fewer international retail chains due to government restrictions that until 2005, did not allow foreign direct investment in this industry. Thus, when looking at the economic indicators of the BRIC countries we find that increased consumption provides opportunities for retail operators.
Best Opportunities Fill in Institutional Voids
From an institutional view the market is a transactional place embedded in information and property rights, and emerging markets are a place where one or both of these features are underdeveloped.† Most definitions of emerging markets are descriptive based on poverty and growth indicators. In contrast a structural definition as proposed by Khanna and Palepu points to issues that are problematic therefore allowing an immediate identification of solutions. Moreover, a structural definition allows us not only to understand commonalities among emerging markets but also to understand what differentiates each of these markets. Finally, a structural approach provides a more precise understanding of the market dynamics that genuinely differentiates emerging markets from advanced economies.
To illustrate, let us contrast the equity capital markets of South Korea and Chile. According to the IFC definition, Korea is not an emerging market because it is an OECD member, however, when we look at its equity capital market we notice that until recently it was not functioning well, in other words it has an institutional void. Chile on the other hand is considered an emerging market in Latin America but has an efficient capital market, thus no institutional void appears in this sector. However, Chile has institutional voids in other markets such as the products market.
Strategy formulation in emerging markets must begin with a map of institutional voids. What works in the headquarters of a multinational company does not per se work in new locations with different institutional environments. The most common mistake companies do when entering emerging markets is to overestimate the importance of past experience. This common error reflects a recency bias, or when a person assumes that recent successful experiences may be transferred to other places. A manager incorrectly assumes that the way people are motivated in one country would be the same in the new country (context). It may be assumed that everyone likes to be appreciated, but the way of expressing appreciation depends on the institutional environment. Khanna and Palepu point out that the human element is the cornerstone of operating in new contexts. Ultimately, human beings, who provide a mix of history, culture, and interactions, create institutions.
In short, based on Khanna and Palepu’s institutional approach to emerging markets it is necessary to answer several questions. Which institutions are working and missing? Which parts of our business model (in the home country) would be affected by these voids? How can we build competitive advantage based on our ability to navigate institutional voids? How can we profit from the structural reality of emerging markets by identifying opportunities to fill voids, serving as market intermediaries?
Strategies for Emerging Markets
The work of Khanna and Palepu indicates that there are four generic strategic choices for companies operating in emerging markets:
• Replicate or adapt?
• Compete alone or collaborate?
• Accept or attempt to change market context?
• Enter, wait, or exit?
Emerging markets attract two competing types of firms, the developed market-based multinationals and the emerging market-based companies. Both bring different advantages to fill institutional voids. Multinational enterprises (MNEs) bring brands, capital talent, and resources, whereas local companies contribute with local contacts and context knowledge. Because they have different strengths and resources, foreign and domestic firms will compete differently and must develop strategies accordingly.
Table 1.4 summarizes the strategies and options for both multinational firms and local companies.
Table 1.4 Responding to institutional voids
|
Strategic choice |
Options for multinationals from developed countries |
Options for emerging market-based companies |
|
Replicate or adapt? |
• Replicate business model, exploiting relative advantage of global brand, credibility, know-how, talent, finance, and other factor inputs. • Adapt business models, products, or organizations to institutional voids. |
• Copy business model from developed countries. • Exploit local knowledge, capabilities, and ability to navigate institutional voids to build tailored business models. |
|
Compete alone or collaborate? |
• Compete alone. • Acquire capabilities to navigate institutional voids through local partnerships or JVs. |
• Compete alone. • Acquire capabilities from developed markets through partnerships or JVs with multinational companies to bypass institutional voids. |
|
Accept or attempt to change market context? |
• Take market context as given. • Fill institutional voids in service of own business. |
• Take market context as given. • Fill institutional voids in service of own business. |
|
Enter, wait, or exit? |
• Enter or stay in market spite of institutional voids. • Emphasize opportunities elsewhere. |
• Build business in home market in spite of institutional voids. • Exit home market early in corporate history if capabilities unrewarded at home. |
Source: Khanna and Palepu (2010)
An example of how companies fill institutional voids is provided by Anand P. Arkalgud (2011).10 Road infrastructure in India is still under-developed in terms of quality and connectivity. Traditionally, Tata Motors has been the dominant player in the auto industry but when it started to receive competition from Volvo in the truck segment and by Japanese auto makers in the car segment Tata responded. It created a mini-truck that not only provided more capacity and safety than the two and three-wheeled pollutant vehicles used to access market areas but also an environmentally sound vehicle, one that could easily maneuver U-turns in such narrow streets.
Another case in India involved Coca Cola, who discovered that their beverages were being sold “warm.” Coca Cola realized that it needed a solution to sell its product “chilled.” The reason for the warm bottles was that electricity supplies in these remote locations were unstable especially in summer periods. Thus the company developed a solar-powered cooler and partnered with a local refrigeration company.
Tarun Khanna and Krishna Palepu propose the following five contexts as a framework in assessing the institutional environment of any country. The five contexts include the markets needed to acquire input (product, labor, and capital) and markets needed to sell output. This is referred to as the products and services market. In addition to these three dimensions the framework includes a broader sociopolitical context defined by political and social systems and degrees of openness. When applying the framework managers need to ask a set of questions in each dimension. An example of these questions is indicated in Table 1.5 below.
Table 1.5 Framework to assess institutional voids
|
Institutional dimension |
Questions |
|
Product markets |
1. Can companies easily obtain reliable data on customer tastes and purchase behaviors? Are there cultural barriers to market research? Do world-class market research firms operate in the country? 2. Can consumers easily obtain unbiased information on the quality of the goods and services they want to buy? Are there independent consumer organizations and publications that provide such information? 3. Can company’s access raw materials and components of good quality? Is there a deep network of suppliers? Are there firms that assess suppliers’ quality and reliability? Can companies enforce contracts with suppliers? 4. How strong are the logistics and transportation infrastructures? Have global logistics companies set up local operations? 5. Do large retail chains exist in the country? If so, do they cover the entire country or only the major cities? Do they reach all consumers or only wealthy ones? 6. Are there other types of distribution channels, such as direct-to-consumer channels and discount retail channels that deliver products to customers? 7. Is it difficult for multinationals to collect receivables from local retailers? 8. Do consumers use credit cards, or does cash dominate transactions? Can consumers get credit to make purchases? Are data on customer creditworthiness available? 9. What recourse do consumers have against false claims by companies or defective products and services? 10. How do companies deliver after-sales service to consumers? Is it possible to set up a nationwide service network? Are third-party service providers reliable? 11. Are consumers willing to try new products and services? Do they trust goods from local companies? How about from foreign companies? 12. What kind of product-related environmental and safety regulations are in place? How do the authorities enforce those regulations? |
|
Labor markets
|
1. How strong is the country’s education infrastructure, especially for technical and management training? Does it have a good elementary and secondary education system as well? 2. Do people study and do business in English or in another international language, or do they mainly speak a local language? 3. Are data available to help sort out the quality of the country’s educational institutions? 4. Can employees move easily from one company to another? Does the local culture support that movement? Do recruitment agencies facilitate executive mobility? 5. What are the major post recruitment-training needs of the people that multinationals hire locally? 6. Is pay for performance a standard practice? How much weight do executives give seniority, as opposed to merit, in making promotion decisions? 7. Would a company be able to enforce employment contracts with senior executives? Could it protect itself against executives who leave the firm and then compete against it? Could it stop employees from stealing trade secrets and intellectual property? 8. Does the local culture accept foreign managers? Do the laws allow a firm to transfer locally hired people to another country? Do managers want to stay or leave the nation? 9. How are the rights of workers protected? How strong are the country’s trade unions? Do they defend workers’ interests or only advance a political agenda? 10. Can companies use stock options and stock-based compensation schemes to motivate employees? 11. Do the laws and regulations limit a firm’s ability to restructure, downsize, or shut down? 12. If a company were to adopt its local rivals’ or suppliers’ business practices, such as the use of child labor, would that tarnish its image overseas? |
|
Capital markets
|
1. How effective are the country’s banks, insurance companies, and mutual funds at collecting savings and channeling them into investments? 2. Are financial institutions managed well? Is their decision making transparent? Do noneconomic considerations, such as family ties, influence their investment decisions? 3. Can companies raise large amounts of equity capital in the stock market? Is there a market for corporate debt? 4. Does a venture capital industry exist? If so, does it allow individuals with good ideas to raise funds? 5. How reliable are sources of information on company performance? Do the accounting standards and disclosure regulations permit investors and creditors to monitor company management? 6. Do independent financial analysts, rating agencies, and the media offer unbiased information on companies? 7. How effective are corporate governance norms and standards at protecting shareholder interests? 8. Are corporate boards independent and empowered, and do they have independent directors? 9. Are regulators effective at monitoring the banking industry and stock markets? 10. How well do the courts deal with fraud? 11. Do the laws permit companies to engage in hostile takeovers? Can shareholders organize themselves to remove entrenched managers through proxy fights? 12. Is there an orderly bankruptcy process that balances the interests of owners, creditors, and other stakeholders? |
|
Political and social system
|
1. To whom are the country’s politicians accountable? Are there strong political groups that oppose the ruling party? Do elections take place regularly? 2. Are the roles of the legislative, executive, and judiciary clearly defined? What is the distribution of power between the central, state, and city governments? 3. Does the government go beyond regulating business to interfering in it or running companies? 4. Do the laws articulate and protect private property rights? 5. What is the quality of the country’s bureaucrats? What are bureaucrats’ incentives and career trajectories? 6. Is the judiciary independent? Do the courts adjudicate disputes and enforce contracts in a timely and impartial manner? How effective are the quasi-judicial regulatory institutions that set and enforce rules for business activities? 7. Do religious, linguistic, regional, and ethnic groups coexist peacefully, or are there tensions between them? 8. How vibrant and independent is the media? Are newspapers and magazines neutral, or do they represent sectarian interests? 9. Are nongovernmental organizations, civil rights groups, and environmental groups active in the country? 10. Do people tolerate corruption in business and government? 11. What role do family ties play in business? 12. Can strangers be trusted to honor a contract in the country? |
|
Openness
|
1. Are the country’s government, media, and people receptive to foreign investment? Do citizens trust companies and individuals from some parts of the world more than others? 2. What restrictions does the government place on foreign investment? Are those restrictions in place to facilitate the growth of domestic companies, to protect state monopolies, or because people are suspicious of multinationals? 3. Can a company make greenfield investments and acquire local companies, or can it only break into the market by entering into joint ventures? Will that company be free to choose partners based purely on economic considerations? 4. Does the country allow the presence of foreign intermediaries such as market research and advertising firms, retailers, media companies, banks, insurance companies, venture capital firms, auditing firms, management consulting firms, and educational institutions? 5. How long does it take to start a new venture in the country? How cumbersome are the government’s procedures for permitting the launch of a wholly foreign-owned business? 6. Are there restrictions on portfolio investments by overseas companies or on dividend repatriation by multinationals? 7. Does the market drive exchange rates, or does the government control them? If it’s the latter, does the government try to maintain a stable exchange rate, or does it try to favor domestic products over imports by propping up the local currency? 8. What would be the impact of tariffs on a company’s capital goods and raw materials imports? How would import duties affect that company’s ability to manufacture its products locally versus exporting them from home? 9. Can a company set up its business anywhere in the country? If the government restricts the company’s location choices, are its motives political, or is it inspired by a logical regional development strategy? 10. Has the country signed free-trade agreements with other nations? If so, do those agreements favor investments by companies from some parts of the world over others? 11. Does the government allow foreign executives to enter and leave the country freely? How difficult is it to get work permits for managers and engineers? 12. Does the country allow its citizens to travel abroad freely? Can ideas flow into the country unrestricted? Are people permitted to debate and accept those ideas? |
Cases11
A series of recent case studies of Western companies operating in emerging markets illustrates the diversity and complexity of marketing issues faced in areas such as socio-cultural dynamics, market orientation, brand strategies, product development, market entry, communications, and social media (Mutum, Roy, and Kipnis, 2014). Even though most cases in Mutum et al’s (2014) research have lessons that are relevant for this chapter, we specifically draw on a selected few cases directly related to market entry.
Principles:
• Speed up new product development for firms aiming to increase export involvement
• Pressure for business responsiveness demands adaptation capabilities to the local environment
• Diverse range of marketing strategies
Case: Kraft–Cadbury in India
In 2010, the U.S. based Kraft Foods, Inc. acquired Cadbury, a UK-based confectionary maker. Cadbury was founded in 1824 and as of 2009 it held a 10 percent share of the global market for chocolate, gums, and candy industry. It had a strong presence in emerging markets where it held a dominant position in relation to other major competitors. One particular market where Cadbury had a well-established presence for over 60 years is India. One reason why Kraft Foods acquired Cadbury was precisely to access to emerging markets, namely India and China, where Kraft’s presence was marginal. Prior to acquiring Cadbury, Kraft did not have any meaningful presence in India, and currently it is entering India’s packaged food market with new innovative products and packages. For example the Kraft’s Oreos brand has been repackaged using Cadbury’s banner and is being funneled through Cadbury’s network of mom-and-pop stores.
Case: McDonalds in India
McDonalds entered India in 1996 and by 2011 it had opened 211 restaurants in tier 1 and tier 2 cities across the country. In a country where people are biased toward their own food habit and cultures, one might expect foreign food retailing companies to face challenges upon entering India. However, while this was hitherto the scenario, it has changed recently with the new lifestyles and food consumption patterns in India, namely due to increased disposable income of middle and upper classes. McDonalds took advantage of these opportunities by adapting the menu to Indian tastes and offering home delivery.
Conclusion
Entry mode‡ is determined by product, market and organizational factors. In regard to products, companies need to know whether the nature and range of the product, along with available marketing strategies will require any adaptation. If so, they should consider a partner in that emerging market. Usually a higher level of control and resource commitment in the foreign market is required for new or wider product offerings as well as higher levels of adaptation. When taking into account market factors managers need to consider physical distance and experience, as well as identify appropriate marketing strategies and distribution channels, and priorities in revenues, costs, and profits.
Organizationally, major concerns are communication with foreign operations and control of overseas activities. One particular concern in foreign markets is the control of assets. Firms will prefer to internalize activities where there is a higher chance of opportunism by the partners in the emerging market.