Studies have shown that only about 5 percent of companies can master the complexity of emerging markets, but those that do are 75 percent more profitable than every other company in their competitive set. If your company can successfully navigate the challenges, focus on the market and grow in an intelligent manner, the opportunities are tremendous.
In a recent interview, Managing Partner Harsh Koppula talked on the challenges organizations face as they attempt to expand business into today's dynamic emerging markets.
Interviewer: What factors make growth in emerging markets most challenging today?
Harsh: One of the biggest challenges facing foreign companies in emerging markets today is the complexity of demand. In these markets, demand is often highly volatile, which can be confusing to foreign organizations. Leaders in these companies are accustomed to their own markets, where they understand demand patterns; they can predict economic cycles; they have a better grasp on consumer behavior. Their forecasting models in those markets are relatively mature and developed.
But in emerging markets, everything changes. Supply and demand shape is not easily understood. Foreign companies often get rattled by this uncertainty and this new set of variables. Their management teams have trouble processing all of the new information, and that tends to ripple through their entire value chain.
Companies also must consider the significant variability of several important economic drivers in emerging markets. For example, currency fluctuation can be significant. the volatility of demand can impact commodity prices, which rise and fall with demand. And, because wages in emerging markets are rising substantially, labor may not be as cost-effective as expected. When organizations struggle with this variability, they begin to lose their pricing power in the market and their costs begin to rise. This might cause them to shrink in order to become profitable - or, in some cases, to pull out of the market altogether.
Another challenge to growth is increased competition from local companies. These local organizations may not be as sophisticated, but they understand the market and they have cost-structure advantages. They don't have much overhead, and they're able to sell products at a very reasonable cost, which presents a big challenge to foreign companies.
Over the last eight to 10 years, the landscape has become very different. Demand volatility, commodity price fluctuation - all of these factors have accelerated, and it is very difficult for companies to deal with them.
Interviewer: What advice would you give organizations that are looking to expand in emerging markets?
Harsh: I would say you need to fully commit yourself to the market. You need to deploy the necessary talent, both in terms of quality and quantity. If you don't have a highly-motivated team that is going to work hard to lay out a strategy and then execute it quickly, you will certainly not succeed.
But, you also need a solid business structure that ties the organization together. Every part of your company needs to be running optimally, because as you're executing your strategy, you will need to be able to synchronize and maneuver all of your moving pieces with precision and speed. In effect, you're really running a war room. You must constantly be asking: "Where is talent short? Where is supply short? Where is information short?"
And if flexibility is still important in developed markets, where fluctuation is relatively tame, it is absolutely vital in emerging markets. All aspects of your entire enterprise must be designed to turn on a dime in response to market and environment changes. Your business strategies can, and likely will, transform very quickly, so you need to be able to detect changing trends and then adjust to them rapidly...
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