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Article - Strategies that fit Emerging Markets.doc

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Wilfrid Laurier University
Pat Lemieux

Article – “Strategies That Fit Emerging Markets” • Top management teams of large corporations, acknowledge that globalization is the most critical challenge faced today • Keenly aware that it has become tougher in the past decade to identify internationalization strategies and to choose which countries to deal business with • Most companies have stuck to the strategies they’ve traditionally deployed, which emphasize standardized approaches to new markets while sometimes experimenting with a few local twists • Many multinational corporations are struggling to develop successful strategies in emerging markets • Part of the problem is the absence of specialized intermediaries, regulatory systems, and contract- enforcing mechanisms in emerging markets hampers the implementation for globalization strategies • Companies in developed countries usually take for granted the critical role that “soft” infrastructure plays in the execution of their business models in their home markets • Companies can’t find skilled market research firms to inform them reliably about customer preferences so they can tailor products to specific needs and increase people’s willingness to pay • Many companies shied away from emerging markets when they should have engaged with them more closely • Since the early 1990s, developing countries have been the fastest growing market in the world for most products and services • Companies can lower costs by setting up manufacturing facilities and service centers in those areas, where skilled labor and trained managers are relatively inexpensive • Several developing-country transnational corporations have entered North America and Europe with low-cost strategies and novel business models • Western companies that want to develop counterstrategies must push deeper into emerging markets, which foster a different genre of innovations than mature markets do • If Western companies don’t develop strategies for engaging across their value chains with developing countries, they are unlikely to remain competitive for long • In general, advanced economies have large pools of seasoned market intermediaries and effective contract-enforcing mechanisms, whereas less-developed economies have unskilled intermediaries and less-effective legal systems o Because the service provided by intermediaries either aren’t available in emerging markets or aren’t very sophisticated, corporations can’t smoothly transfer the strategies they employ in their home countries to those emerging markets Why Composite Indices are Inadequate • Many corporations enter new lands because of senior managers’ personal experiences, family ties, gut feelings, or anecdotal evidence • Others follow key customers or rivals into emerging markets; the herd instinct is strong among multinationals • For instance, the reason US companies preferred to do business with China rather than India for decades was probably because of America’s romance with China • Companies that choose new markets systematically often use tools like country portfolio analysis and political risk assessment, which chiefly focus on the potential profits from doing business in developing countries but leave out essential information about the soft infrastructures there • Executives usually analyze a nation’s GDP and per capita income growth rates, its population composition and growth rates, and its exchange rates and purchasing power parity indices • Such composite indices are no doubt useful, but companies should use them as the basis for drawing up strategies only when their home bases and target countries have comparable institutional contexts • Composite indices don’t flash warning signals to would-be entrants about the presence of institutional voids in emerging markets • Composite index-based analyses of developing countries conceal more than they reveal o Brazil, Russia, India and China appeared similar on several indices; the key success factors in each of those markets have turned out to be very different o For instance, in China and Russia, multinational retail chains and local retailers have expanded into the urban and semi-urban areas, whereas in Brazil, only a few global chains have set up shop in key urban centers 1 • BRIC may all be big markets for multinational consumer product makers, but executives have to design unique distribution strategies for each market • That process must start with a thorough understanding of the differences between the countries’ market infrastructures How to Map Institutional Contexts • Executives need to figure out how the product, labour and capital markets work, and don’t work, in their target countries • This will help them understand the differences between home markets and those in developing countries • The five contexts framework places a superstructure of key markets on a base of sociopolitical choices • Many multinational corporations look at either the macro factors or some of the market factors, but few pay attention to both Context 1: Political and Social Systems • Every country’s political system affects its product, labour, and capital markets • For example, socialist societies such as China prevent the establishment of trade unions in the labour market, impacting wage levels • Government support in South Africa has affected the development of the capital market o Such transfers usually price assets in an arbitrary fashion, making it hard for multinationals to figure out the value of South African companies and affects their assessments of potential partners • Executives do well to identify a country’s power centers, such as its bureaucracy, media and civil society, and figure out if there are checks and balances in place • Managers must also determine how decentralized the political system is, if the government is subject to oversight, and whether bureaucrats and politicians are independent from one another • Companies should gauge the level of actual trust among the populace as opposed to enforced trust Context 2: Openness • Often talk about the need for economies to be open because they believe it’s best to enter countries that welcome direct investment by multinational corporations • Companies can get into countries that don’t allow foreign investment by entering into foreign investment by entering into joint ventures or by licensing local partners • The more open a country’s economy, the more likely is it that global intermediaries will be allowed to operate there • Multinationals, therefore, will find it easier to function in markets that are more open because they can use the services of both the global and local intermediaries • For instance, Chile, a military coup in the early 1970s led to the establishment of a right-wing government, and that government’s liberal economic policies led to a vibrant capital market in the country o The country’s labor market remained underdeveloped because the government did not allow trade unions to operate freely • Openness affect the development of markets; o If a country’s capital markets are open to foreign investors, financial intermediaries will become more sophisticated Context 3: Product Markets • Developing countries have opened up their markets and growth rapidly during the past decade, but companies still struggle to get reliable information about consumers • Market research and advertising are in their infancy in developing countries, and it’s difficult to find the deep databases on consumption patterns that allow companies to segment consumers in more- developed markets • Because of a lack of consumer courts and advocacy groups in developing nations, many people feel they are at the mercy of big companies Context 4: Labor Markets 2 • In spite of emerging markets’ large populations, multinationals have trouble recruiting managers and other skilled workers because the quality of talent is hard to ascertain • Relatively few search firms and recruiting agencies in low-income countries • High-quality firms that do exist focus on top-level searches, so companies must scramble to identify middle-level managers, engineers, or floor supervisors • Colleges in specialized education have increased, but apart from a few considered elite, no way for companies to determine which schools produce skilled managers Context 5: Capital Markets • Capital and financial markets in developing countries are remarkable for their lack of sophistication • Apart from a few stock exchanges and government appointed regulators, there aren’t many reliable intermediaries like credit-rating agencies, investment analysts, merchant bankers, or venture capital firms • Multinationals can’t count on raising debt or equity capital locally to finance their operations • Creditors don’t have access to accurate information on companies • Business can’t easily assess the creditworthiness of other firms or collect receivables after they have extended credit to customers • Corporate
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