Despite the uncertainty surrounding the European debt crisis, geopolitical tensions in the Middle East, slowdowns in China and Brazil, and other external headwinds, multinational executives face aggressive 2012 emerging markets growth targets. Frontier Strategy Group’s clients tell us that their 2012 targets are in line with 2011 performance, despite the fact that 2011 enjoyed more favorable tailwinds.
In the past, Western consumer products companies have been able to rely on higher-income consumers to drive growth. These consumers often have tastes and preferences in line with those of Western consumers, and place a premium on the cachet of Western brands. And, given the relatively early stage of market maturity, there was plenty of white space for first-movers to take advantage of.
Looking into the future, Western companies will face a new paradigm characterized by more competitors fighting for share of a decelerating premium market. White space will shrink as more companies enter and expand in emerging markets in search of growth to offset the slowdown in the West. Concurrently, growth of the premium segment in key markets such as China will plateau. To achieve their targets in such an environment, executives will need to consider more innovative and aggressive strategies.
A new paradigm in emerging market customer dynamics
The changing dynamics of a softening and increasingly competitive premium market demand a new approach in how executives should think about emerging markets. Aggregated across the BRICs, middle tier households (as measured by annual household income) will actually surpass lower-tier households in sheer quantity by 2014. What this means is that the traditional market segmentation of the market pyramid will soon morph into what we like to refer to as the “Market Diamond”. As executives are thinking about emerging markets, the Market Diamond represents the idea that the middle market will be so compelling that both local competitors and multinational companies cannot afford to ignore such a large market opportunity.
A race to the middle
The only way to fight the inevitable market squeeze (competition and lower growth at the top-end, and increased local competition from the bottom-end) is to prioritize product localization strategies and move down the diamond into this huge opportunity. Growing into new market segments is not an easy task, and choosing the right strategies depends in part on executive tolerance for risk.
FSG has identified two key root challenges that are preventing companies and executives from implementing these eight middle market strategies: 1) corporate risk aversion, and 2) organizational misalignment. To provide a framework for overcoming these challenges, FSG has defined eight steps that represent increasingly aggressive strategies for penetrating the middle market, and profiled the strategies and tactics leading companies have used to mitigate the risks associated with each strategy:
- Redefine metrics of success
- Operational efficiency
- Adjusting price
- Distribution strategy
- Branding strategy
- Adapting products
- Reverse innovation
The best companies are acting now
Mounting evidence suggests that emerging market based companies will continue to develop new capabilities and increase in levels of sophistication. Local competitors are increasingly following their current low-income customers into the middle market as those customers’ tastes and preferences evolve, and if multinationals fail to act now, they may find that they are arriving to the game too late. As the world economy continues to globalize, sophisticated emerging market based companies are no longer anomalies, but are more frequently becoming the norm. This trend illustrates that companies we now consider “local competitors”, might soon in the future become just “competitors”.
*Sam Osborn, Senior Analyst at Frontier Strategy Group contributed to this piece.