Many multi-national companies are reluctant to tailor their strategy to each developing market in which they operate. This hesitance is due to a variety of reasons: It can be costly and cumbersome to modify products, services and communications to suit local practices, and the opportunity may be considered relatively small and risky.
Organizational processes and cost structures can pose a challenge to selling products and services at an optimal price point in emerging markets, and thus companies often opt to occupy smaller, more premium niches. Conversely, local companies that operate in only a few geographic markets do not face the same limitations. The market structure in developing countries can help local companies counter their multinational rivals.
Most product markets comprise of four distinct tiers/segments:
- Premium/global segment. Global customers that want high quality products with the same features as those in developed markets, and they are willing to pay global prices for them.
- “Glocal” segment. Customers that demand products of global quality but with local features at a lower cost versus global prices.
- Local segment. Customers that want local products with local features at local prices.
- Bottom of the pyramid (BOP). Customers that can only afford the most inexpensive products.
Institutional voids in developing countries—the lack of market research and the fragmented distribution network—have posed a challenge to multinational countries in both understanding customer needs and consequently having the ability to service them. Thus when a market opens up, multinational companies rush into the global tier, while local companies dominate the local tier. There are also opportunities in the BOP, but companies need to develop different strategies to pursue these customers. Over time the glocal tier has become the battleground between local and multinational corporations.
Glocal-tier customers demand global products with local features, and companies in developing or emerging markets are capitalizing on their local-market knowledge. In many cases they have an advantage over multi-national companies, because they are more knowledgeable about the business ecosystem and can be more nimble in adapting to the unique needs of the local markets. They have also expanded across borders by exploiting similarities between markets within geographical proximity.
Regional markets have unique customer needs and preferences. Local companies are aware of this fact and build their businesses around the distinct local needs. They can also venture into other emerging markets because they have product knowledge coupled with competitive cost base. While entering these markets, they tend to avoid head-to-head competition with foreign companies and focus on niche opportunities that allow them to capitalize on their existing strengths. This strategy allows them to gradually expand their capabilities while learning how to operate in developed markets, giving them the experience to compete more effectively with multinational giants when their local market matures.
Should You Go Global?
A company must understand the correlation between global scope and performance. Does being global provide a competitive advantage? Not every world-class company has a global footprint, many sell strictly local; and the financial performance of companies that have diversified across several countries is not necessarily superior to the performance of those that have remained local.
Before going global, answer the following questions:
- Does the product have a competitive strategy?
- Does the product have economies of scale, scope and economies?
- What location are you pursuing?
- What is the choice of entry and who is your partner?
- What is the level of risk related to local policies and regulations?
- What is the product segment and what is your scale-up strategy?
When a multi-product firm makes the decision to go global it must weigh the advantages of globalizing its entire portfolio simultaneously versus using a subset of product lines as the launching pad for internal globalization. Global expansion forces a company to develop and expand at least three types of capabilities: knowledge about foreign markets, skills at managing foreign people in foreign locations, and skills at managing foreign subsidiaries. Without these capabilities, firms are likely to remain strangers in a foreign land, with global expansion posing a high risk. Globalizing the entire portfolio of products at once compounds these risks dramatically. Often it is wiser to choose one or a small number of product lines as the initial launch vehicle for globalization.