Developing economies represent one of the biggest opportunities for companies, but also present new pitfalls. Many businesses struggle to navigate these markets. They make decisions based on the wrong frameworks or information, and they struggle to raise capital in the right markets. Companies must develop strategies that fit emerging markets.
One of the biggest challenges for companies is dealing with supply chain issues. Because most developing nations lack sophisticated infrastructures, businesses have difficulty collecting receivables and assessing the creditworthiness of competitors. Even though many countries have trade agreements, their government still finds ways to block trade. This can hurt both parties.
Other barriers to doing business in these markets include lack of effective contract enforcing mechanisms. Likewise, many developing nations do not have skilled intermediaries. These intermediaries are typically not equipped to provide the complex services that multinational corporations need. Moreover, there are few reliable data sources available to help companies determine how consumers in these countries are using their products and services.
Developing nations do not have effective corporate governance. This is a problem because it is impossible for multinationals to trust that their partners adhere to local laws. Similarly, there are few government bodies that can give advice on the quality and features of products and services.
Increasingly, companies are turning to umbrella brands to create scale in these markets. For example, Coca-Cola is investing behind its Thums Up brand in Brazil. Another large consumer product maker, Unilever, captures about one-third of its revenue and operating income from emerging markets. In India, Unilever controls about half the detergent market. It also has significant business in China.
Western companies need to expand their reach to these markets, but they need to do so with the right strategies. Affordability is another key issue. Consumers in emerging markets have limited financial means and need to have a strong brand that they can afford. The success of consumer goods multinationals depends on their ability to build strong positions in these markets.
Emerging economies are growing at three times the rate of developed economies. The number of young consumers in these countries has increased dramatically in the past decade. As a result, they are fostering different kinds of innovations than mature markets. However, some of the most innovative and successful companies have established leadership positions in emerging markets. Using umbrella brands and local brands has become a popular strategy among experienced multinationals.
Developing countries are not as open as they were in the early 1990s. This has meant that a large portion of the global economy has been driven by less-developed nations. Yet, in the past few years, some of these economies have begun to shift away from globalization. Nevertheless, they remain lucrative markets.
Many multinationals are finding that it is hard to successfully transfer their strategy from their home markets to emerging markets. To do so, companies must understand the institutional differences between the developed and developing world. Firms that learn this knowledge will select the optimal strategies for their business.