Building Effective Business Models in Emerging Markets

TCI Asia Competitiveness Forum April 26 and 27, 2012 New Delhi, India

Why are Emerging Markets Important?

Emerging markets have enjoyed exponential growth. In 1990 they represented 21% of global GDP, by 2008 this had grown to 34% and by 2010 to 38%. Emerging markets have continued to grow even in economic downturns.

Davies, G. (2011). Emerging vs. developing countries GDP growth rates 1986-2015. Financial Times

Emerging from the Mist: The Rise of Emerging Markets

By 2015, Emerging markets will account for 50% of the worlds GDP

In 2008 the economies of the six largest emerging markets were larger than the G-7 economies combined with the exception of the United States.

Will Emerging Markets Overheat?

For economies growing at 6.5 to 7 percent, their margins of excess capacity have been largely used up, which could cause contraction. Inflation and heavy inflows from investment are beginning to bog down emerging markets. Higher prices but lags in wage growth have caused destabilization and unrest in some emerging markets. Danger exists for these economies to slam on the breaks.

However, it is likely that emerging markets can provide substantial opportunities for companies/investors in the foreseeable future.
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What should companies understand?

Dont just focus on what customers need, focus on what they want. New entrants and small enterprises will likely find it easier to develop market oriented solutions in lower end emerging markets than will large corporations. Corporates will likely do better in mega-markets such as BRIC (Brazil, Russia, India, and China). Domestic enterprises can be formidable competition because they understand the market and may have more vertical and lateral flexibility to maneuver. There must be a demarcation in the term affordability versus the terms cheap or inexpensive. A key to success in emerging markets is the development of a business model that allows a company to reach formerly unreachable customers.

What should companies understand?

Recruitment of talent is a key aspect in developing an effective business model, as is exploring collaboration with local firms, suppliers, and transport companies. Integrating the four elements of strategy, customer value, affordability, and access is key to the creation of a effective business model. Market recognizance should be of primary importance to companies seeking to enter emerging markets. Being nimble and fleet of foot are key aspects of effective business model creation.

An overview of business models in emerging markets

Market Based: Allows companies to determine the end-state they desire for involvement in emerging markets. Volume/Price Based: Offers products and services to customers at prices they can afford, yet the volume of business makes the scenario viable for the company. Tier Based: Provides ranges of products and services to companies based on their ability to pay. Collaboration Based: Allows companies to piggyback products and services through existing supply chains, thus enabling customers to gain access to them at prices they can afford. Innovation Based: Typically used by companies that can add incremental improvements to a product/service that add relatively small cost but generate high value.

Integrated Channels: Allows companies to involve more people in the production and distribution process, thus creating operation synergy that favorably impacts revenues and creates space for local partners.

How can a company determine which approach is right for them?

The Business Model Canvas

The Canvas consists of 9 building blocks: 1. Value Proposition 2. Customer Segments 3. Channels 4. Customer Relationships 5. Revenue Streams 6. Cost Structures 7. Key Activities 8. Key Resources 9. Key Partners

Osterwalder, A. & Pigneur, Y. (2009). Business model generation. ISBN-978-2-8399-0580-0.

Copyright 2012 Deloitte Development LLC. All rights reserved.

Business Model Case Study 1: WalMart

Developed a J/V with Bharti Purchased $125 million annually from local producers Focused on wants of the middle class Built workforce capacity through development of training centers Opened up other opportunities such as establishment of R&D Center in Bangalore

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Business Model Case Study 2: Nokia in India and Whirlpool in China

Nokia:

Whirlpool:
Nascent understanding of local culture Lack of communication Unclear relationship with local partners $300 million loss by 2000.

Captured 51% of the market by 2010 using a flexible business model Used creative financing Opened up mfg opportunities Utilized local distribution networks

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Business Model Case Study 3: Softwin

Utilized highly educated labor Started small with 1-2 core products Built international networks Continually assessed the market for opportunities

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Business Model Case Study 4: Rubicon

Created a business model flexible enough to create and take advantage of opportunities Infused innovation as a core Established a network of small business suppliers Focused on high quality Built strong international networks

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Business Model Case Study 5: AGD

Took advantage of economies of scale Enhanced/improved/de veloped logistics to link all parts of the value chain Recalibrated its values/vision Developed brand for local market Transformed its business model multiple times

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Business Model Case Study 6: eTranzact

Understood and addressed market demand Linked technology and banking services Overcame cultural paradigms Continually expanded services based on demand

Copyright 2012 Deloitte Development LLC. All rights reserved.

What are the takeaways relative to the creation of effective business models in emerging markets?
Do not assume. It can be dangerous, strategically unsound, and a recipe for disaster. Find a niche. Dont try to be everything to everyone. Find an area where you can compete and focus there. Start small and grow from there. Unless you have a large corporate presence, take a lower risk approach of testing the market with a small presence and then growing this presence strategically.

Focus on innovative approaches. Dont stay with the status quo. Find ways to infuse innovation into many facet of your business.
Build alliances with local stakeholders. They know the market and can assist your company in navigating unfamiliar regulations, customers, and distribution systems.