Five Myths About Emerging Markets Don’t let misperceptions derail your success. by Radu Auf der Heyde and Kristy Sundjaja
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merging markets offer the possibility o enormous priority on technology products and services over other growth. Unortunately, many western companies discretionary items. Consumer spending on telecom, or enter them at a strategic disadvantage. Operating instance, is showing a compound annual growth rate o under misguided notions about emerging mar10%–15% in most emerging markets, compared with kets, they create offerings that ofen ail to meet the needs o less than 5% in developed markets. Mobile phones have consumers and business customers. As a result, these compa- rapidly become the most common consumer electronics nies miss out on significant growth opportunities. device in the world, with over three billion in use at the How significant? Consider the technology, end o 2007. communications, and media sectors. Research conducted Growth in consumers’ use o the Internet (including by Oliver Wyman revealed that companies in these sectors broadband access in households) has also proven explothat were headquartered in emerging-market countries sive in many emerging markets. In 2001, the United States grew their market capitalization by 38% annually over had 500 Internet users or every 1,000 people, a penetrathe past five years, compared with 15% or companies tion rate o 50%. Tat same year, China’s penetration rate headquartered in mature markets. Moreover, seven was just 2.6%. But by 2007, China’s rate had jumped to o the top 10 best-perorming companies were either 12.3%. In only six years, China added more than 130 milheadquartered in an emerging market (such as the Hong lion Internet users—almost as many as the total number Kong–based China Mobile and the New Delhi–based o Internet users in the U.S. Bharti Airtel) or had aggressively invested in emerging At the enterprise and small-business level, technology markets (such as eleónica, headquartered in Spain but is a vital tool in emerging markets. In Arica, or instance, heavily invested in Latin America, and elenor, based in small armers can easily access weather inormation and Norway but with operations in eastern Europe and south market prices or their crops via their mobile phones. Asia). In China, 57% o small-business managers we surveyed Tis article dissects the five most prevalent myths strongly agreed with the statement “echnology is critical about emerging markets. It’s based on our client work to create a competitive advantage or my business.” business.” Industry as well as our surveys o more than 20,000 consumers analysts orecast large increases in enterprise telecom and businesses in developing markets. Although this spending in developing markets, particularly in wireless, article ocuses on the technology, communications, and media sectors, its lessons are relevant to any company Money in the Middle considering a move into an emerging Total spend = $2.1 trillion market. $ billions MYTH 1: EMERGING MARKETS ARE TECHNOLOGY BACKWATERS
Based on this assumption, companies have targeted emerging markets primarily with low-end products that contain just basic eatures. Yet our research shows rapid adoption o technology in emerging markets; in some cases, adoption has been so swif that it’s leaprogged that in western markets. Consumers and businesses in developing markets place a high
100% High disposable income Medium disposable income
$ 443
$ 373
$ 791
$ 471
80
60
Medium disposable income = $1.3 trillion or $924 per capita
40 Low disposable income
20
0
20%
Brazil Source: Euromonitor, Oliver Wyman analysis.
Copyright © 2008 by Harvard Business School Publishing Corporation. All rights reserved.
Russia
40%
60%
India
80%
China
100%
Myths About Emerging Markets
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over the next five years, while mature European markets, though representing larger expenditures, will experience slower growth. Leaprogging is common. Many consumers are going directly to laptop purchases rather than starting with the traditional desktop models. And many emergingmarket operators have begun offering services such as cash payments and balance transers via mobile phones. Kenya’s Saaricom (Vodaone) M-PESA has a service that allows mobile customers to perorm basic operations like cash deposit, withdrawal, and transer. MYTH 2: EMERGING-MARKET CONSUMERS CAN’T AFFORD TECHNOLOGY PURCHASES
Tis is simply not true. More than 80% o consumers in key emerging markets have sufficient disposable income to allow them to purchase technology. (See the exhibit “Money in ithe liMiddle.”)l Tese markets have affluent i consumer segments, and even middle-income consumers are able to spend a significant amount on technology. And not just any technology. Our research shows that consumers and small businesses in developing countries want and will pay or higher-quality products and innovative eatures. One survey in the BRIC markets (Brazil, Russia, India, and China) showed that small businesses were willing to pay a 20% to 30% price premium
How Brand Affects PC Preference 100%
=BRIC small business
80 70 % of respondents
60 50 40 30 20 10 0 Unbranded PC
Local/national brand PC
International brand PC
Source: Oliver Wyman analysis.
Consumers and small-business owners were asked how likely they were to purchase an unbranded PC, a l ocal or national brand of PC, or an internationally branded PC.
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MYTH 3: CONSUMERS IN EMERGING MARKETS WON’T PAY A BRAND PREMIUM
Most technology executives have assumed that global corporations would have difficulty commanding a he althy brand premium in emerging markets. Tey think that low-cost, no-name local competitors would win most o the market share. Tey need to think again. In Brazil, or example, 59% o our survey respondents said they were “extremely likely” to purchase an international brand PC as their next home computer. In another survey, about printers, we ound that brand was a more important actor in customer decision-making in all our BRIC markets than it is in western markets. Like consumers, small-business owners in emerging markets are intensely interested in branded products. In BRIC, or instance, small-business survey respondents said they were “extremely likely” to purchase an international brand PC as their next computer. (See the exhibit “How Brand Affects PC Preerence.”) One reason is risk aversion. Strong global brands are considered saer than local brands with limited track records. MYTH 4: TECHNOLOGY OFFERINGS FROM MATURE MARKETS WILL SUCCEED IN EMERGING MARKETS
=BRIC consumer 90
or smaller or aster printers. Another consumer study ound only small differences in technology purchasing patterns between middle- and high-income customer segments. Considering that the middle-income segment can represent up to 70% o the total population in some emerging markets, these consumers are attractive.
What’s good enough in mature markets, executives assume, should work in emerging markets. But the evidence shows that companies should create offerings with product eatures and pricing tailored to the specific needs o consumers in developing markets. And in some cases they should consider completely new business models. Products that have been customized or local priorities have attracted intense interest. elecom giant Nokia saw a huge potential market in rural India, where 70% o that nation’s population resides. Nokia designed its mobile phones with a flashlight eature (handy in a region with unreliable electricity), a dustproo keypad, multiple address books, and individual call-time tra cking (or shared use o phones). Tough the phones are large and thus less appealing in mature markets, these unique eatures make them convenient and attractive to rural HARVARD MANAGEMENT UPDATE | AUG UST 2008
Myths About Emerging Markets
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Indians. Nokia then adapted its marketing strategies to the distinctive characteristics o rur al India. For example, it sent mobile vans to remote villages to tout the phone’s benefits and to gather additional insights on rural customers’ needs. MYTH 5: EMERGING-MARKET CONSUMERS FOCUS ON PRODUCTS, NOT SERVICES
Many firms have neglected to develop their service offerings and have missed opportunities to offer bundled solutions to emerging-market customers. We perormed several studies to investigate the role o support services, such as telephone troubleshooting and in-home setup, in driving technology product sales in developing nations. Te evidence showed that these services have a significant impact on sales. For example, or customers purchasing a PC, the availability o support could enhance sales by as much as 10%. Te potential or support services to drive product sales is even greater among business customers than among individual consumers. In a study o small and mediumsize businesses in BRIC, two-thirds o respondents said they were “likely” or “very likely” to buy on-site maintenance services afer purchasing a technology device, as well as automated replenishment services or the device’s supplies. u Radu Auf der Heyde is a San Francisco–based associate partner and Kristy Sundjaja is a New York–based associate partner of Oliver Wyman. They can be reached at
[email protected]. Reprint # U0808C: To order a reprint of this article, call 800-668-6705 or 617-783-7474.
HARVARD MANAGEMENT UPDATE | AUGUST 2008
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