Does size matter? The advantage of being a small firm in an emerging market

Posted by the7stages on August 19, 2015
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The international economy encourages a wider distribution of goods between continents. An emerging market is an economy that has not yet developed at the same level as those in the first world.

CEO’s and top management teams of large corporations, particularly in North America, Europe, and Japan, acknowledge that globalization is the most critical challenge they face today. Most companies have stuck to the strategies they’ve traditionally deployed, which emphasize standardized approaches to new markets while sometimes experimenting with a few local twists. As a result, many multinational corporations are struggling to develop successful strategies in emerging markets. Many small businesses invest time and capital to take advantage of business opportunities in emerging markets in countries across the world.

The people who live in an emerging market, however, still have plenty of labor to offer and a need for the goods you sell, resulting in some big advantages for companies that establish outposts in these countries.

Deloitte, a worldwide financial firm, notes that companies in emerging economies must expand capacity and capability. As large companies build power plants, roads and dams, small businesses step in to provide the locals with the goods and services they need. As the region’s economy develops, the small businesses that open up shop earlier may have a better chance at building lasting relationships with customers.

The greatest success in emerging markets doesn’t come from simply establishing a sales office and selling their existing products and services. Instead, it are the special requirements of customers in each emerging market and the designed offerings to meet their needs at market appropriate prices that are key success factors. Another key ingredient in success is to establish company-owned production, service, distribution, R&D and other operations in emerging markets to become closer to customers and part of the local business community.

Executives see the greatest opportunities and strategies in the following:

  • Opportunities remain in the BRIC (minus Russia). Among 10 leading emerging markets, executives surveyed were most likely to expect revenue increases of 25 percent or more over the next three years in Brazil, India and China.
  • Bigger is better. According to respondents whose companies had revenues of $5 billion or greater—those larger companies were more likely to have exceeded their sales revenue goals in emerging markets over the last three years, while small companies (less than $500 million in revenue) were the least likely to have done so.
  • Go local. Companies that had company-owned operations in at least five of six major emerging markets were much more likely to have exceeded their revenue goals. In addition, some successful strategies were using local sales/service centers, employing company-owned sales and distribution and employing a company-owned supply chain. Local operations may provide advantages such as greater knowledge of customer needs and buying habits, greater brand awareness in the market and more experience in navigating government approvals and procedures.
  • Know your customer. Designing products specifically for customers in the local market and offering a different value proposition were considered as among the most successful strategies. When it came to challenges identified by survey participants, one of the top challenges in five of the six emerging markets studied was to provide products/services that meet customer needs at prices they can afford.

Small and mid-sized companies enter foreign markets with less overhead, flatter hierarchies and a more entrepreneurial approach to the market, says Ken Esch, a partner in Price Waterhouse Coopers’ private company services practice in Chicago. “They are more agile than larger firms,” he says. “They have the flexibility to try new products quickly, and if they don’t work, they can move on to something else.” Indeed, smaller firms must leverage these strengths as the race to set up shop in foreign markets heats up. According to a 2011 Price Waterhouse Coopers survey of 236 executives in the US, 51% of private companies plan on expanding overseas in the next one to two years, and 48% already have a global presence. Among these firms, 74% are focused on fast-growing emerging markets.

“There is a tremendous amount of commerce that is taking place among emerging markets,” said Broadman. “In 1970, South-South trade was about seven percent of world trade. Today, it is 20 percent of world trade.”

Additional readings: Competing with Giants: Survival Strategies for Local Companies in Emerging Markets

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