In today’s global economy, companies are achieving more of their revenue and profits from developing countries. Unilever, Coca-Cola, Gillette, and Nestlé now capture one-third of their revenue from emerging markets. This trend is only growing. For example, Unilever saw 90% of global growth from emerging markets during 2008-2014. By next year, the company expects these markets to deliver 75% of its total revenue.
But how should companies think about entering or expanding operations in frontier markets? They can’t copy and paste the market entry tactics they’ve employed in developed markets. They can (and should) focus on last mile distribution and pricing strategies, but that isn’t a comprehensive strategy. Resonance conducted 25 expert interviews and a literature review to assess how companies are bringing sustainably-focused products to frontier and emerging markets. Our findings indicate that many companies are struggling with market entry. Those who use inclusive business practices are more likely to find success.
As one interviewee said, “You need to check your assumptions. Just because you are successful in one market doesn’t mean it will be the same in others. People are not taking the time to learn. They just want to apply a ‘proven’ model.”
An inclusive business perspective helps us understand and integrate a market’s social, ecological, and economic characteristics. According to the World Business Council on Sustainable Development, “an inclusive business is a sustainable business that benefits low-income communities. It is a business initiative that, keeping its for-profit nature, contributes to poverty reduction through the inclusion of low-income communities in its value chain.” Companies that practice inclusive business include lower-income communities throughout value chains, rather than simply targeting them as consumers.
By applying the lens of inclusive business to market entry, companies are better prepared. They can contextualize their business model to system-wide characteristics of the local market, operating environment, and regulatory environment. An inclusive lens helps companies let go of the ‘go-and-grow’ mindset and take the long-term perspective needed for true success. Companies can apply this lens using a three-step framework:
How To Unlock Frontier Markets In 3 Steps
1. Distinguish the maturity level of the company’s operations in a market by classifying its maturity stage.
Each stage presents different system-wide challenges. Is the company new to the market (Entry)? Is it already in the market but looking to grow (Growth)? Has it established growth but must optimize its efforts to become more efficient in its operations (Optimization)?
2. Map the value chain.
For companies targeting low-income populations in frontier markets, products and services should not be the sole focus. Instead, companies must break down what is needed to bring the model to market. This may include storage and handling, distribution, sales, and promotions. Teams can then identify gaps in the marketplace, such as lack of distributions channels.
3. Map actions to the larger ecosystem.
After a company has deconstructed its value chain (step #2), it can analyze the root causes of gaps in the market ecosystem. Once the value chain activities are clear, companies can apply those activities to the target market. Questions like “Will distributors be capable of servicing the territory?” will arise. Mapping value chain activities within the larger ecosystem highlights bottlenecks. It also provides the opportunity to innovate.
Once a company has identified potential challenges, it can address them by using the following tactics:
How To Address Challenges In Frontier Markets
Define long-term strategic objectives for frontier markets.
Frontier markets hold massive long-term potential. Initial entry efforts are often defeated by systemic challenges. To gain that first-to-market advantage and build a sustainable business model, companies should take a long-term perspective—and prepare for potholes (figuratively and sometimes literally).
Build an agile organization tailored to the market’s needs.
Frontier markets are of interest because of their future potential. By nature, that means these markets are dynamic. Country teams must be responsive to changes. They should also include domestic talent who understand the culture and have experience overcoming local challenges.
Identify attractive investment opportunities and understand those segments’ needs.
There are lucrative pockets of value in emerging markets. Emerging markets account for over 50% of Fast Moving Consumer Goods (FMCG). FMCG sales growth in emerging markets is two to four times higher than growth in developed markets. Companies can identify where they are best positioned to compete by mapping market demographic and economic trends to product offerings.
Apply customer analytics across the value chain.
Today, improving the customer experience is vital. Customer centricity is especially important in frontier markets. Each market brings its own cultural, social, and economic norms. Mass solutions are inefficient. Companies can customize strategies to address affordability, accessibility, and awareness. They can predict target customer needs through data and analytics. Data gathering can yield insights about customers’ purchase behavior and preferences, that can then inform the creation and delivery of customer experiences across the value chain.
Diversify and innovate in last mile distribution channels.
Frontier markets have challenging infrastructures. This may include unreliable roads, power access, or port infrastructure. Delivery of products and services to the final destination may be convoluted. Companies should consider novel approaches to distribution channels, such as drone delivery of medicine to rural clinics, or port construction to access coastal urban areas.
By following these tactics, companies can adapt their developed market business models to frontier market contexts. Frontier market business models are not one-size fits all. Companies must tailor models to the context of each ecosystem in which they are deployed.
Large companies looking to tie their future success to global demographic shifts can’t just think about consumers. They need to consider the environment in which those consumers will live and thrive.
Companies should be prepared to participate in market building, and integrate communities throughout value chains. The companies that can successfully employ these inclusive business practices will have a leg up in the global economy, and they may well be the lasting global brands of the 21st century.