How To Operate In Developing Markets

Businesses can gain three main advantages by investing in developing world markets: 1) a new source of revenues, 2) lower operating costs, and 3) access to innovation.

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Multinationals gain three main advantages by investing in developing world markets: 1) a new source of revenues, 2) lower operating costs and 3) access to innovation. Managers can capitalize by setting up R&D in developing markets and partnering with local businesses, NGOs and entrepreneurs. They can also profit by outsourcing operations to low-cost regions and marketing not to individuals, but to communities.

Background

The world's poor form a market of 4 billion people, the vast majority of the world population. Until recently, companies assumed serving developing world markets was unprofitable because these nations lack infrastructure, have unstable currencies and may have strict governments. Yet, political reform, increasing openness to investment and new low-cost networks are providing better access for companies. This research examines how companies can profit from these markets, while helping meet the needs of the poor and driving economic development.

Findings

Businesses can gain three main advantages by expanding into developing world markets:

1) New sources of profit.When Unilever's Indian subsidiary introduced high quality candy, it became the fastest growing category in their portfolio. Not only is the company profitable, it estimates revenues at $200 million per year. They have had similar success with low-priced detergent and iodized salt.

2) Reduced operation costs. OrphanIT.com's marketing telecentres in India and the Philippines pay 10% of similar labour services in the United States.

3) Innovation.Ericsson's MiniGSM cell phone service provides stand-alone networks for up to 5,000 users within a 35km radius. Capital costs to the operator, usually a local entrepreneur, can be as low as $4 when cell phones are shared in communities.

Implications for Managers

To operate successfully in developing world markets companies can choose from several strategies:

  • Become educated about developing world markets.One way is to send executives to villages to participate in community projects and talk with citizens about company and competitor products.

  • Market products to communities, not individual consumers. This not only widens your customer base, it increases asset productivity. A shared internet line can serve 50 people per day, generating more revenue than if it were dedicated to a single customer at a flat rate.

  • Outsource operations to low-cost labour markets. This keeps costs down and enhances growth, since creating new jobs increases local purchasing power.

  • Set up R&D units in developing countries focused on local opportunities to capitalize on innovation.

  • Create partnerships. Experienced businesses will better understand market dynamics, while partnerships limit risks for both parties. NGOs and community groups can provide information on consumer behaviour. Local entrepreneurs can help build large networks for investments.

Implications for Researchers

We suggest future research follow: 1) successful strategies as companies expand into developing world markets; 2) how expansion affects these countries' economic development, and; 3) whether products serve the poor's needs or are used to exploit them.

Methods

This article uses case studies to outline a business case for entering developing world markets and to provide examples on how to apply these strategies.

Prahalad, C.K., & Hammond, Allen. (2002). Serving the World's Poor, Profitably. Harvard Business Review,80(9): 1-11.



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Lauren Rakowski