Thursday, February 21, 2008

Bandits, Drug Traffickers, and other Barriers to Entry

Last week in Barcelona at the Mobile World Congress (the conference formerly known as 3GSM), attendees got a taste of what it really means to bring technology to frontier markets. Karim Kohja, CEO of Afghanistan telecom operator Roshan, described the challenges of expanding into rural Afghanistan. He woke up his audience with the story of his unexpected entry into the “financial services industry” when he had to carry boxes of cash into bandit-infested mountains. Kohja quickly learned that, if reaching remote customers was easy, they would already be subscribers.

While the Afghanistan telecom example is extreme, it is not unique. Barriers to entry are typically segment- and geography-specific, and mature-market experience does not necessarily help a company prepare for them. Vital Wave Consulting field researchers know this well – before conducting interviews or taking photos of technology usage in the favelas of Rio de Janeiro, they must request permission from local drug traffickers. Oftentimes the more remote the region or poor the market, the greater the challenge. But, emerging-market expansion is not always so treacherous. Many, for instance Eastern European countries, can look and act more like developed markets than their least developed counterparts such as those in Sub-Saharan Africa. And the least developed markets can also offer unexpected advantages. Markets that have not yet been penetrated by technology have fewer barriers to entry (e.g., no legacy systems to upgrade, less competition).

Companies eager to find growth opportunities in emerging markets must balance their appetite for risk with the urgency to grow. Businesses may chose to work with partners to share the risk or to avoid the most extreme situations. Others may chose to embrace the risks and hedge against them with business rigor, including tested business models, credible market and business intelligence, and reliable supply chains. Businesses with such a toolkit will mitigate emerging-market risks and gain a reliable measure of potential rewards. These are the firms most likely to effectively tackle the unique barriers to entry in new markets.

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Monday, February 18, 2008

Google's China Push Tests Out New Business Models

Last week, the Wall Street Journal (WSJ) delved into Google’s latest strategy to compete with Baidu, a formidable (and market-leading) search engine competitor in the Chinese market. Google has not been shy about its plans to beat Baidu on their home turf and a new joint venture with a Chinese online music company shows they are going for Baidu’s jugular. Baidu’s success rests precariously on popular free, unlicensed music downloads, straining relationships with the Chinese (and global) music industry. Google’s strategy to compete in China features free, high-quality, licensed music downloads in return for a share of ad revenues and download data for music labels.

While the WSJ focused on the horse race between Google and Baidu in China, they undervalued the article’s true technology business nugget – the music industry’s willingness to sign on to an entirely new business model. Universal Music Group has already agreed to participate in Google’s new scheme, and EMI Group, Sony BMG Music Entertainment, and Warner Music are interested. Vital Wave Consulting research has found that a non-traditional partner paired with a new business model can be a potent mix in emerging markets like China. And emerging-market consumers - even those with little disposable income – rank entertainment high on their list of basic needs. With music industry sales down and illegal music downloads outnumbering licensed downloads 20-to-1 worldwide, the timing is right for music labels to consider new ways of profiting from the ubiquitous online distribution of songs. With this solution, Google may manage to find a way to meet user demands for free music with the blessing of the record labels. Moreover, with China Mobile already signed on as a key partner for Android (Google’s open source mobile platform), this could have far-reaching implications for song distribution via mobile phones in one of the world’s largest markets.

If Google successfully applies this model in China, there is little to stop them from expanding it to the developed world. The flow of developing-country innovations to mature markets is increasingly common (e.g., pre-paid phone cards and mobile payments). Google’s music distribution scheme could eventually affect the technology and entertainment industries in the U.S. and Europe. The search giant’s competitors would be wise to secure non-traditional entertainment partners who would value alternative monetization schemes such as ad revenues. These creative partnerships will attract eyeballs and revenues in markets worldwide.

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Thursday, February 7, 2008

Measuring Gates' Creative Capitalism

Last month’s World Economic Forum provided a good setting for one of Bill Gates’ parting speeches as a Microsoft employee and his personal reflections on the role of capitalism in the modern world. Speaking to global industry and political leaders, Gates urged his audience to find a way to ensure that capitalism serves the world’s poor. Labeling this vision “Creative Capitalism,” Gates advocated a twin mission for corporations: make profits and improve the lives of those who do not currently benefit from market forces. As Gates shifts to management of his $39 billion foundation, he will encourage the world’s largest businesses to design products and services that address the needs of the poor. He suggested that, when profit is not feasible, corporations should be motivated by the recognition that comes with serving the poor.

While “Creative Capitalism” may gain currency as a new buzz word, the concept is not new. Many large multinational corporations (MNCs) have tried to find the right mix of pure philanthropy, market development and business development in poor countries. HP’s e-Inclusion program, AMD’s 50x15 initiative and Cisco’s Networking Academies are (or were) pioneering programs that merge self-interest with service. With a new spotlight on this type of business approach, it is worth noting the most common reason for failure – the challenge of measuring results. While Gates stressed the value of recognition, he did not explain how business managers can measure it. To garner the support of shareholders and ensure long-term company commitment, all forms of value should be quantifiable.

Gates’ spotlight on business in new markets will surely increase public pressure on MNCs to demonstrate efforts in this area. This presents an opportunity for MNCs to apply rigorous business practices to their emerging-market effort. MNCs that are committed to becoming recognizable leaders in the developing world will ensure that programs designed to capitalize on new markets are fully incorporated into the company’s main lines of business, rather than lumped into a soft basket of corporate social responsibility (CSR) initiatives. By developing new methods for quantifying abstract values, business managers can see both the immediate and long-term value of investments in new markets. If companies react to Gates’ call by beefing up their CSR programs, they will be missing out on the lessons learned long before “Creative Capitalism” showed up at Davos.

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How to Compete with Emerging Giants

Seasoned business managers know to expect competition from unexpected places. Still, new global players from developing countries have caught many in the global business community by surprise. Last week’s Economist explored the phenomenon of emerging-market companies that are joining the ranks of the world’s largest multinational corporations (MNCs). Emerging-market companies, such as Huawai, Lenovo, and Infosys, are buying out rivals, merging with other small companies in key geographies, and quickly expanding into developed-country markets. These up-and-coming MNCs benefit from fast decision-making processes (common in family-owned and well-connected businesses) and scrappy managers who honed their skills on the tough local markets of developing countries.

Even with these advantages and homegrown talents, emerging-market companies will have to work hard to compete globally. Developed-country consumers often consider products from emerging-market countries as inferior. Even “made in Japan” once carried a stigma that Japanese companies had to overcome. To reassure consumers and compete in the global marketplace, emerging-market companies will face an up-hill battle even with the benefit of low-cost resources, tenacity, and drive. For U.S. and European MNCs, maintaining their position as Fortune 500 companies requires quick and decisive action to create locally relevant products and services for developing countries. The final business frontiers are quickly morphing from a potential growth opportunity to a business necessity equal in importance to traditional markets. Neither market can be left unattended for long.

To compete in emerging markets, developed-country MNCs have to use their traditional strengths (brand, influence, wealth and depth of business experience) PLUS all the same tools their new competitors will bring to the game (low costs, quick decision-making, creative distribution, local knowledge and a tolerance for low margins). For developed-country MNCs, this points to the creation of highly autonomous regional branches, innovation along the value chain, or acquisition of well-run organizations (without the imposition of parent-company baggage to slow them down). These are disruptive changes to any business and have impact on traditional methods of performance measurement. Publicly traded MNCs would benefit from ensuring clear and compelling explanations of their strategies in emerging markets to both internal and external audiences to increase their appreciation of the necessity and benefits of change.

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