19.2 Strategies for Entering and Operating in Emerging Markets
6 min read•july 31, 2024
Emerging markets offer enticing opportunities for global businesses, but they come with unique challenges. Companies must carefully select entry strategies, balancing control, risk, and resource commitment. Options range from low-risk to high-control , each with its own pros and cons.
Success in emerging markets requires more than just entry. Companies must adapt products, build strong partnerships, and navigate complex institutional environments. This involves conducting thorough market research, developing innovative solutions, and cultivating relationships with local stakeholders to overcome institutional voids and cultural differences.
Market Entry Strategies for Emerging Markets
Comparing Entry Strategies
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- Market entry strategies for emerging markets include exporting, , , , and wholly-owned subsidiaries
- Each strategy offers varying levels of control, risk, and resource commitment
- Exporting involves selling products to customers in foreign markets, either directly or through intermediaries
- Requires minimal investment but offers limited control over marketing and distribution
- Low-risk entry strategy (indirect exporting through distributors, direct exporting to retailers)
- Licensing and franchising grant local firms the right to use intellectual property or business model
- Allow rapid expansion with low capital investment
- May risk brand dilution if not properly managed
- Examples: McDonald's franchising in India, Coca-Cola licensing bottlers in Africa
- Joint ventures involve partnering with local firms to share resources, risks, and rewards
- Provide access to local knowledge and networks
- May lead to conflicts in management and control
- Examples: GM-SAIC joint venture in China, Unilever-Hindustan Lever in India
- Wholly-owned subsidiaries offer the highest level of control but require significant investment
- Suitable for companies seeking long-term presence and full operational control
- Expose the company to market risks
- Examples: Apple's retail stores in China, BMW's manufacturing plant in Brazil
Factors Influencing Strategy Selection
- Choice of entry strategy depends on various factors
- Market potential (size, growth rate, competition)
- Regulatory environment (trade barriers, local content requirements)
- Competition (intensity, market structure)
- Firm's resources and objectives (financial capacity, long-term goals)
- Thorough analysis of these factors crucial for successful market entry
- Conduct comprehensive market research and feasibility studies
- Assess internal capabilities and resource availability
- Emerging markets present unique challenges
- Institutional voids (lack of intermediaries, regulatory systems)
- Rapidly changing regulations (economic reforms, policy shifts)
- Cultural differences (business practices, consumer preferences)
- Entry strategies must be adaptable to navigate these complexities effectively
- Develop flexible business models
- Build strong local partnerships
- Invest in market intelligence and continuous learning
Product Adaptation for Emerging Markets
Market Research and Consumer Insights
- Conduct comprehensive market research to understand local consumer preferences
- Analyze demographic trends (age distribution, urbanization rates)
- Study consumer behavior (purchasing habits, brand loyalty)
- Examine socio-economic factors (income levels, social mobility)
- Implement strategy to adapt global products or services to fit local tastes
- Modify product features (e.g., Whirlpool's adaptation of washing machines for Indian market)
- Adjust packaging (size, design, language)
- Tailor pricing strategies (value-based pricing, sachet marketing)
- Develop frugal innovation capabilities to create affordable, high-quality products
- Redesign products to reduce costs without compromising essential functionalities
- Examples: Tata Nano affordable car, GE's portable ECG machine
Innovation and Product Development
- Utilize reverse innovation by developing products for emerging markets
- Later introduce these innovations in developed markets
- Create new revenue streams and competitive advantages
- Example: Renault's Logan car, developed for emerging markets, later sold in Europe
- Establish local R&D centers or innovation hubs
- Gain deeper insights into local market needs
- Facilitate rapid product development and adaptation
- Leverage local talent and resources effectively
- Examples: Microsoft's research center in Bangalore, P&G's innovation center in Singapore
- Implement flexible manufacturing and supply chain strategies
- Accommodate diverse and volatile demand patterns in emerging markets
- Develop modular product designs
- Create adaptable production processes
- Example: Unilever's flexible manufacturing units for personal care products in Asia
Distribution and Market Access
- Develop alternative distribution channels tailored to emerging markets
- Address unique infrastructure and retail landscape challenges
- Utilize mobile commerce platforms (M-Pesa in Kenya)
- Partner with local micro-entrepreneurs (Unilever's Shakti program in India)
- Adapt marketing and communication strategies
- Consider local media consumption habits
- Leverage social media and digital platforms
- Develop culturally relevant advertising campaigns
- Implement innovative last-mile delivery solutions
- Use motorcycle delivery services in congested urban areas
- Collaborate with local shops as pickup points
- Develop mobile retail units for rural areas
Building Partnerships in Emerging Markets
Partner Selection and Due Diligence
- Conduct thorough due diligence on potential partners
- Assess reputation, financial stability, and alignment with company values
- Perform formal assessments (financial audits, legal reviews)
- Conduct informal network inquiries (industry contacts, local experts)
- Develop clear partnership strategy outlining roles and responsibilities
- Define expectations for all parties involved
- Establish mechanisms for conflict resolution
- Create exit strategies if necessary
- Invest in building strong personal relationships with key stakeholders
- Engage with government officials, industry leaders, and community influencers
- Attend local business events and industry conferences
- Participate in corporate social responsibility initiatives
Governance and Communication
- Implement robust governance structures and communication protocols
- Ensure transparency and alignment between partners
- Conduct regular joint steering committee meetings
- Establish clear reporting mechanisms and performance metrics
- Develop local talent and promote knowledge transfer
- Implement training programs for local employees
- Facilitate exchange programs between company and local partners
- Create mentorship opportunities for high-potential local staff
- Establish network of local advisors and consultants
- Gain insights on market dynamics and regulatory changes
- Develop early warning system for potential challenges or opportunities
- Examples: Local law firms, industry associations, economic think tanks
Flexible Partnership Models
- Create adaptable partnership structures
- Respond to changing market conditions and evolving business objectives
- Implement phased investment approaches
- Include options for increasing equity stakes over time
- Develop multiple partnership types to address different needs
- Strategic alliances for market access (Walmart-Bharti in India)
- Technology partnerships for innovation (IBM's partnerships with local startups)
- Supply chain collaborations for efficiency (Nestlé's dairy farmer partnerships)
- Regularly review and adjust partnership strategies
- Conduct periodic performance evaluations
- Assess alignment with long-term business goals
- Renegotiate terms as market conditions evolve
Navigating Emerging Market Environments
Understanding Institutional Frameworks
- Develop comprehensive understanding of institutional environment
- Study formal rules (laws, regulations, property rights)
- Examine informal rules (cultural norms, business practices)
- Analyze enforcement mechanisms and their effectiveness
- Implement robust management strategies
- Conduct scenario planning for potential political instability
- Develop contingency measures for policy changes or economic volatility
- Utilize political risk insurance when appropriate
- Cultivate relationships with key government stakeholders
- Engage in dialogue with regulatory bodies
- Participate in industry associations and chambers of commerce
- Contribute to public-private partnerships for development initiatives
Organizational Adaptation and Compliance
- Develop adaptive organizational structures and decision-making processes
- Allow for rapid responses to changing market conditions
- Empower local management teams with greater autonomy
- Implement matrix structures to balance global and local priorities
- Implement rigorous compliance and ethics programs
- Address specific challenges of emerging markets (corruption risks, IP protection)
- Conduct regular training for employees and partners
- Establish whistleblower mechanisms and internal audits
- Create strategies to navigate institutional voids
- Develop alternative financing mechanisms (microfinance initiatives)
- Build private infrastructure (power generation, logistics networks)
- Establish industry standards and self-regulatory bodies
Stakeholder Management and Social Responsibility
- Implement comprehensive stakeholder management strategies
- Address needs and concerns of diverse groups (local communities, NGOs, media)
- Develop social license to operate through community engagement
- Mitigate reputational risks through proactive communication
- Integrate corporate social responsibility into business strategy
- Align CSR initiatives with local development goals
- Partner with local NGOs and government agencies on social projects
- Measure and report on social and environmental impact
- Develop crisis management and communication plans
- Prepare for potential reputational or operational crises
- Establish clear communication channels and spokesperson roles
- Conduct regular crisis simulation exercises
Key Terms to Review (21)
Cost Leadership: Cost leadership is a competitive strategy where a company aims to become the lowest-cost producer in its industry, allowing it to offer lower prices than its competitors. This approach helps companies gain market share and establish a strong position in both domestic and international markets. Achieving cost leadership typically involves optimizing operational efficiencies, reducing production costs, and leveraging economies of scale, which can be especially crucial when benchmarking against global best practices or entering new markets.
Cross-Cultural Management: Cross-cultural management is the practice of managing and coordinating people, teams, and organizations across different cultures and social contexts. It emphasizes understanding cultural differences, values, and behaviors to effectively lead diverse workforces and facilitate collaboration in a global business environment. This management approach is crucial for multinational corporations as they navigate the complexities of operating in various cultural landscapes, adapt to globalization's effects on business dynamics, strategize for emerging markets, and comply with evolving regulatory frameworks.
Cultural barriers: Cultural barriers refer to the obstacles that arise from differences in cultural backgrounds, beliefs, and practices that can hinder effective communication and understanding between individuals or groups. These barriers can manifest in various ways, such as language differences, varying social norms, and differing values. Recognizing and addressing these barriers is crucial for successful interactions in diverse environments, especially when managing teams or entering new markets.
Currency risk: Currency risk refers to the potential for financial loss due to fluctuations in exchange rates between currencies. This risk can significantly impact international business operations, influencing profitability and pricing strategies in global markets, while also affecting decisions related to investment, financing, and overall financial performance.
Differentiation Strategy: A differentiation strategy is a business approach where a company seeks to distinguish its products or services from those of competitors by offering unique features, quality, or customer experience. This strategy allows firms to target specific segments of the market, often enabling them to charge premium prices and build brand loyalty. Effective differentiation can involve innovation, quality control, branding, and customer service, and is critical for success in a competitive global landscape.
Eclectic Paradigm: The eclectic paradigm, also known as the OLI framework, is a theory that explains why multinational enterprises (MNEs) choose to engage in foreign direct investment. It combines three key components: Ownership advantages, Location advantages, and Internalization advantages, which help firms decide where and how to expand internationally. This framework helps in understanding the structure of multinational organizations and their strategies for entering new markets, especially in developing regions.
Exporting: Exporting is the process of selling goods or services produced in one country to customers in another country. This practice allows businesses to tap into foreign markets, increasing their sales potential and diversifying their market presence. It plays a vital role in global trade and helps multinational corporations expand their operations, penetrate new markets, and leverage competitive advantages.
First-mover advantage: First-mover advantage refers to the competitive edge gained by a company that is the first to enter a new market or develop a new product. This advantage can result from establishing strong brand recognition, securing prime distribution channels, and creating customer loyalty before competitors arrive. The concept is particularly significant in global strategy formulation and in strategies for entering and operating in emerging markets, as being the first player can shape market dynamics and influence future success.
Foreign Direct Investment: Foreign direct investment (FDI) refers to an investment made by a company or individual in one country into business interests located in another country, typically involving a significant degree of control or ownership. FDI plays a crucial role in international business as it reflects the commitment of investors to a foreign market, driving economic growth and development in host countries while allowing investors to access new markets and resources.
Franchising: Franchising is a business model where a franchisor grants a franchisee the rights to operate a business using the franchisor's brand, products, and operational systems in exchange for fees and royalties. This model is significant as it allows for rapid expansion of a brand while providing local operators with established support and a recognized name.
Glocalization: Glocalization is the process of adapting global products or services to meet the specific needs and preferences of local markets while maintaining a global brand presence. This concept emphasizes the importance of blending global and local strategies, allowing businesses to effectively engage with diverse consumer bases across different regions.
Joint Ventures: Joint ventures are business arrangements where two or more parties come together to form a new entity, sharing resources, risks, and profits while maintaining their distinct legal identities. This collaborative approach allows companies to leverage each other's strengths, access new markets, and combine their expertise to achieve common goals.
Licensing: Licensing is a business arrangement in which one company allows another to use its intellectual property, such as patents, trademarks, or technology, under specific conditions. This practice facilitates access to new markets and technologies while enabling companies to generate revenue without having to invest in manufacturing or infrastructure. Licensing is significant for multinational corporations as it aids their international expansion, helps manage innovation across borders, and provides strategies for entering emerging markets.
Localization: Localization is the process of adapting a product, service, or marketing strategy to meet the specific needs and preferences of a particular local market. It involves not just translating language but also modifying cultural references, images, and functionalities to resonate with local consumers.
Market Penetration: Market penetration is the strategy of increasing a company's market share within an existing market by promoting its products or services more aggressively. This approach often involves enhancing marketing efforts, adjusting pricing strategies, or improving product quality to attract more customers and increase sales. It plays a crucial role in entering and operating in emerging markets, as businesses must find effective ways to compete and grow in these rapidly evolving environments.
PESTEL Analysis: PESTEL Analysis is a strategic tool used to identify and evaluate the external factors that can impact an organization’s performance in the market. It stands for Political, Economic, Social, Technological, Environmental, and Legal factors, and helps businesses understand the broader environment in which they operate. By analyzing these six dimensions, companies can spot challenges and opportunities that arise from changes in the external landscape.
Political Risk: Political risk refers to the potential for losses or adverse effects on business operations due to political changes or instability in a country. It encompasses a wide range of factors, including government actions, social unrest, and changes in legislation, which can affect multinational companies operating in foreign markets.
Supply chain management: Supply chain management involves the coordination and oversight of all activities related to the flow of goods, services, and information from raw materials to the end consumer. This includes sourcing, production, logistics, and distribution processes, which are crucial for ensuring efficiency and effectiveness in meeting customer demand. Effective supply chain management helps businesses reduce costs, improve quality, and respond quickly to market changes.
SWOT Analysis: SWOT analysis is a strategic planning tool used to identify and evaluate the Strengths, Weaknesses, Opportunities, and Threats of an organization or project. This framework helps businesses assess their internal capabilities and external market conditions to make informed decisions about their strategies and direction.
Uppsala Model: The Uppsala Model is a theoretical framework that explains how companies gradually increase their international involvement, emphasizing the importance of learning and experience in foreign markets. It highlights the process of internationalization as a step-by-step approach, where firms start with low-risk entry modes and gradually advance to more significant commitments based on acquired knowledge about foreign markets.
Wholly-owned subsidiaries: Wholly-owned subsidiaries are companies whose entire ownership is held by another company, typically a parent corporation. This means the parent company has complete control over the subsidiary's operations, assets, and decision-making processes. This structure is often used by multinational corporations to enter new markets and expand their global footprint while minimizing risks associated with partial ownership or joint ventures.