New Ruling Class
In just 15 years, half the world’s population will have the discretionary income to consume beyond the basic necessities of life. That growth will push annual consumption in emerging markets to $30 trillion, according to a McKinsey & Co. report, “Winning the$30 Trillion Decathlon: Going for Gold in Emerging Markets.”
It took Britain 150 years and the United States 50 years to double their per-person economic output after industrialization. In contrast, it took China only 12 years and India only 16 to double their GDP per capita.
The insurance industry has been trying to figure out how to capitalize on this phenomenal growth. The complaint I often hear is how difficult it is to gain market share in an emerging economy. Many believe if they build it, consumers will come. Unfortunately, that is not necessarily so. McKinsey found many CEOs of multinationals are “vexed” over how to turn the opportunity into market share. “…despite greater size, larger capital bases, superior product technology and more sophisticated marketing tools, many are struggling to hold their own against local upstarts,” the report says.
The developed world’s 100 largest companies derived only 17% of their revenue from emerging markets in 2010. Those same markets contributed 36% to global GDP. McKinsey predicts that emerging markets will contribute more than 70% by 2025.
Breaking into these markets doesn’t happen overnight. Companies have to master three strategic issues: targeting urban cluster areas; seizing opportunities; and staying in for the long haul. The report lists 10 disciplines for winning:
Target urban growth clusters: Too often, multinationals take a countrywide approach to emerging markets, ignoring the “diversity of consumer preferences, purchasing power, and market conditions” offered by mid-sized cities with growth potential. To illustrate, the population in emerging-market cities grows by “65 million people a year—the equivalent of seven cities the size of Chicago.” A strategy based on a “cluster approach” that targets these second-tier cities is more likely to succeed than one blanketing the entire country.
Anticipate explosive growth: Timing is everything. Pay close attention to the three phases of the S curve of product demand: the “warm-up zone,” where demand gathers steam and incomes begin to rise; the “hot zone,” where consumers have the money to buy; and the “chill-out zone,” where demand flattens or drops off. The S curve varies by product or service. Insurance and other services often take off when income is higher.
Devise segmented strategies for local relevance: Tap into the middle class. Global companies often divide consumers into two groups: the rich with money to burn and the poor looking for the lowest prices, ignoring the growing middle class. McKinsey says “more than half of all Chinese urban households…will be solidly middle class by 2020.”
Radically redeploy resources for the long term: Winners in emerging markets must take big risks and react quickly to change to compete with more agile local competitors. Local companies often grow faster and are far better at adapting to changing local consumer needs than their developed-market competitors.
Innovate to deliver value across the price spectrum: One size doesn’t fit all. Multinationals have to be willing to innovate and tweak products to meet local demand. For example, in India, LG improved the speaker quality on its TVs because consumers liked to listen to music on the TV.
Build brands that resonate and inspire trust: Emerging-market consumers are younger and more optimistic than their developed-nation counterparts, but they are new to consumerism and their patterns are in flux. Brands must build trust and tap into these consumers’ new lifestyle.
Control the route to market: The in-store experience matters more to consumers in emerging markets than to consumers, say, in the United States. Multinationals will have to focus more time and energy in emerging markets on in-house sales and the consumer experience.
Organize today for the markets of tomorrow: Economies of scale give large companies advantages over competitors, but not all processes are efficient when operating in emerging markets.
Turbocharge the drive for emerging-market talent: Skilled workers in local markets are scarce, and competition is stiff. Multinationals will have to offer a clear path for talent, including creating more senior management roles at a faster pace than they would at home.
Lock in key stakeholder support: Build and manage good working relationships with government, business, local leaders and the public. Multinationals should beef up their public relations teams to ensure good communications with all stakeholders.