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.

Also in the news:

• Bill Gates says businesses should design for the poor
• India adds 8 million mobile subscribers last month
• Nokia says emerging markets will keep sales up

You Can't Get There From Here

Nugget readers who have traveled in emerging markets have surely witnessed ineffective distribution channels. One Vital Wave employee recently shared a ferry to an island off the coast of Tunisia with a truckload of sheep. Upon arrival at the island dock, she saw an identical truckload of sheep waiting to board the return ferry to the mainland. Distribution channels, especially for physical goods, plague most emerging-market business ventures, and well-intentioned programs are often derailed by this obstacle. OLPC’s Chief Connectivity Officer, Michail Bletsas, highlighted the distribution issues in a recent interview: “Actually, what we're trying to do is not distribute any PC ourselves….but right now, no one else is trying to do that.” Other organizations are naively ignoring this hurdle. The Australia-based “Be A Hero” aid organization and Bigshop.com announced plans last week to provide underprivileged artisans in Thailand, Cambodia, Papua New Guinea, Manilla, Kenya, Zambia and Zimbabwe with the opportunity to sell their wares to a global audience. There is no mention of how the organizations will manage business process issues such as payment, quality control, distribution, warehousing, delivery or support.

Organizations such as Peoplink and Novica have built similar businesses and continue to struggle with distribution. Delivery times can exceed one month, and the need to warehouse stockpiles of products drives up costs. Distribution presents challenges for all suppliers – those selling products out of the developing world into the developed and vice versa. Some of the predominant issues include lack of reliable infrastructure (roads, railways, electricity, fuel access and postal service), corruption (stolen merchandise and unjust taxes), and extreme environments (dust, rain and heat). While reliance on volunteers and aid organizations may get a program off the ground, distribution is more likely to be successful when sustainable business models provide clear and compelling incentives along the entire distribution chain. Thamel.com, a Nepal-based marketing company that provides gift-giving services for the Nepalese diaspora, stresses the importance of business benefit for all involved. Even with one of the more successful developing-world distribution networks, Thamel.com sometimes puts the burden of product distribution, at least for goat delivery, on the gift recipient.

For businesses expanding into developing-country markets, whether delivering goats or laptops, it is essential to address distribution with creative and reliable solutions. Business managers may be required to invest in local infrastructure to ensure reliable product delivery. For this level of investment, businesses would do well to work closely with senior government leaders to ensure benefits for such investments (similar to traditional benefits given for investments in manufacturing facilities). Local partners, such as Thamel.com, have regional knowledge and established delivery systems that can also point to successful distribution strategies. As effective distribution models are built in developing countries, local industries will benefit from increased efficiencies, and fewer truckloads of sheep will pass each other on the dock.

Also in the news:

• HCL releases Classmate PC for consumers
• Sears sells sub-$200 Linux desktop PCs
• Businesses make progress in designing for developing world

CES Hype Ignores Emerging-market Innovations

The dust is still settling in Las Vegas after 140,000 techies gathered for the annual Consumer Electronics Show (CES) last week. A hotbed of trends, gadgets and futuristic predictions, CES hints at the year’s soon-to-be hottest products and establishes solid predictions for the direction of the industry. This year’s show, responding to increasing media attention, attempted to shine a spotlight on solutions designed for developing countries. With industry representatives from the One Laptop per Child initiative, Qualcomm, Voxiva, AMD, Intel, Microsoft, and Cisco, CES hosted “Technology and Emerging Countries: Advancing Development through Technology Investments.” Even with the emerging-market star power of some of the world’s largest companies, coverage of the session was noticeably absent from CES press reports.

The absence of media attention on technology solutions for developing countries is not surprising. CES, traditionally, has been focused on the bells and whistles of the technology industry. The demand for sexy gadgets and flashy form factors keeps announcements comfortably far from reality and, as a result, only a fraction of the technology gizmos demonstrated make it to market. Successful emerging-market solutions are less often about flashy technology and more about shifts in business models to address day-to-day user needs. While new business models for and investments in emerging markets are not of particular interest to CES bloggers, they continue to be of interest to Wall Street.

Strategic investments that drive growth and true innovation in developing-country markets may be overlooked in the coverage of this year’s CES, but IT analysts are responding to them favorably. IBM, for instance, was rewarded by investors this week when their earnings report showed continued strong growth in emerging markets, making up for a slowing tech spending in the US. For companies just getting into the emerging-market game, there is still time to generate near-term revenues through smart investments. But newcomers are advised to ignore the tech-show drama of “devices in search of a market”, and balance technology innovation with business models and internal restructuring that will enable emerging-market growth.

Also in the news:

• NComputing takes on enterprise
• Apple loses negotiations in China
• OLPC to make XO laptop available in United States

Focus on Affordability Would Help Low-cost Device Makers

2008 is off to an interesting start for the technology industry. Analysts are forecasting slower growth in IT spending globally and banking on emerging-market growth to keep the global economy afloat. Topping the list of IT drama this week is the collapse of the partnership between Intel and OLPC. Though this may not be earth-shattering for the industry, it hurts an initiative that has influenced the growth strategies of many computing device companies.

Even before Intel’s move, it was clear that OLPC is a troubled organization. Many industry and education experts have provided candid recommendations on how the organization can improve its business model, support and installation plans, and usage models in the education environment. However, there remain many positive opinions of the XO machine itself, which features great innovations – a useful monitor, low power consumption, a simplified user interface, and a pull-cord generator. These innovations, accompanied by bold claims and abundant PR around the OLPC initiative, prompted some of the world's largest companies to develop rival low-cost computing solutions. In this way, the OLPC initiative has changed the landscape of the PC industry in developing countries. Regardless of whether this non-profit organization can move beyond its current challenges to successful scale, recent sales and shipments suggest that, at least for now, the OLPC initiative is competing in some way against industry giants.

The dramatic price reductions of low-end PCs are an enormous step for the IT industry in penetrating low-income markets. But IT organizations keen on maximizing their growth, and doing so profitably, would do well to understand the difference between low-cost and affordable. Vital Wave Consulting research shows that affordability is less aligned with actual price than it is with customer cash flow. The majority of computing customers in developing-country markets struggle to make a one-time payment even at the lowest end of PC (and even mobile handset) prices. Yet, they are increasingly willing to take on debt to accelerate their ability to purchase a computing device. Technology acquisition in emerging markets would be dramatically increased through business models that provide a financing component to overcome the cash flow limitations of aspiring yet low-income customers. These business models would also relieve the pressure for ever-decreasing prices and allow the providers of computing devices to maintain reasonable profit margins.

Also in the news:

• Samsung competes for low-end mobile space
• OLPC to dual-boot Windows and Linux
• Laptop sales growing faster in emerging markets

Emerging Markets First, Traditional Markets Second For IBM

This week’s nugget was buried in a New York Times article by Steve Lohr on the lowering of IT-spending projections for 2008. The article contained the complete text of a memo by IBM’s CEO Sam Palmisano to the company’s senior executives. In the memo, Palmisano describes a major change in strategic direction – IBM “will focus first on how to capture all the growth in emerging markets, and then adjust our plans to serve the more traditional markets appropriately.” Palmisano underscores IBM’s continued investment in Brazil, Russia, India and China (BRIC), and announces a $1.6 billion initiative to capture growth opportunities in other parts of Southeast Asia, Eastern Europe, the Middle East, Africa and Latin America. A special emerging-market-based group will drive the initiative, which Palmisano expects to contribute significantly to the company’s revenues by 2010.

Palmisano deserves credit for recognizing the near-term opportunity “beyond BRIC” and providing strong leadership on strategic growth in “second-tier” developing countries. He has a proven track record of backing up past announcements with solid action. The number of employees in India, for example, has increased 40% to 73,000 in a year, reflecting the company’s rapid growth in the region. The BRIC countries have yielded a compound growth rate of 22 percent since 2004. Despite this success, Palmisano clearly understands the importance of bracing senior management for a strategic shift away from more comfortable traditional markets. “This is quite a change in mindset,” he says in the memo, “but that’s what is required to exploit today’s most exciting growth opportunities."

The overt change in focus by IBM and others (Cisco, GE, Microsoft, Nokia) presents an opportunity for regional offices to contribute more directly to the corporation’s strategic direction. With a spotlight on growth opportunities in their local markets, senior leaders in those countries (whether they are from the local area or moved there by the company from abroad) can contribute to company growth by influencing how products and services should be designed to meet local needs and preferences. For IBM to be successful in emerging markets, it will require a sustained commitment to innovation and understanding local markets. The details of Big Blue’s new emerging-market growth initiative will govern its degree of success, but the announcement alone is a bold step in the right direction.
Also in the news:

• Nokia Village Solution due out in Q108
  Cisco WiMax focus on developing countries
• China-based Hasee enters low-cost PC market

Prime Minister Calls for Corporations to Support Development

British Prime Minister Gordon Brown called this week for the support of multinational corporations to help achieve the United Nations’ Millennium Development Goals (MDGs) by 2015. Reports claim he is attempting to enlist the support of over 20 private corporations to use their expertise and resources for capacity building, infrastructure development and capital investments in developing countries. Calling the situation a “development emergency,” Brown believes that the lack of enterprise in some of the least-developed countries is inhibiting growth and the achievement of the MDGs. Private-sector companies already tapped for support include Vodafone and Google. In the coming years, Britain’s development minister will be focusing on initiatives in financial services, mobile phones and agriculture.

Brown raises a critical development issue - the need for enterprise investment to ensure sustainable economic growth in the world’s poorest regions. However, he failed to mention that ICT companies are focusing increasing attention and resources on fast-growing markets in the developing world. Companies like AMD, Intel, Microsoft, Cisco, Nokia and Ericsson have made significant business investments in developing countries. The reason for Brown’s omission may be that the public sector struggles to connect these investments with economic and social growth. Most large corporations, especially in the technology sector, have corporate social responsibility (CSR) programs but the size of philanthropic investments is inherently capped by market forces. These programs often pale in comparison to the business investments made by these companies in developing countries.

Private-sector companies can help the development community and the public sector appreciate the full social and economic impact of their activities in developing countries. The private sector has a direct and positive impact on the developing world through the expansion of local business ecosystems, the commercialization of new products and services designed specifically for these markets, and business models that increase the affordability of productivity tools. Because these efforts are profitable, they are more sustainable than philanthropic activities. Certainly, there is a place for philanthropy and CSR in addressing the challenges in the developing world. But a sustainable approach to addressing global poverty increases the longevity and size of resources committed to such investments. And corporations that identify credible methods for measuring and promoting the social and economic impact of their business efforts to the development community will experience greater business value through increased brand equity, visibility and an enhanced ability to influence local policies.

Also in the news:

• Handset majors may exit entry-level market
• M-payment not taking off in China
• Linux may take over low-end PC market

Bypassing the Network May Connect the Unconnected

This week’s nugget was unearthed when a little-known telecommunications company promised to bring to market a mobile phone that can bypass operator networks and enable users to text and make free calls to people within a one kilometer radius. Sweden-based TerraNet believes the technology addresses the need for communication in developing countries, especially in rural areas where operator networks do not exist, and could also aid in disaster relief. The technology can even be used for free phone calls outside the immediate vicinity if there is a broadband-enabled PC with Voice over Internet Protocol (VOIP) capability within range. Focusing on areas without existing operator networks, TerraNet intends to launch a commercial network in 2008 with revenue models based on licensing and handset sales.

Though TerraNet's technology requires special handsets, the company hopes it will eventually be a feature available on standard phones. Phone manufacturers, however, will have to overcome the objections of operators if they intend to offer a service that bypasses the operator’s network to make free calls. Indeed, many operators – focused relentlessly on competition from other operators and maintaining ARPU (average revenue per user) – may not be prepared for a competitive threat like TerraNet’s solution. Because consumer needs and user habits differ considerably in emerging and mature markets, a solution could quickly become formidable competition in emerging markets while not posing a threat in developed countries.

While TerraNet’s solution poses a threat to telecommunications companies, Vital Wave Consulting suggests that it may also present an opportunity for PC maufacturers and local entrepreneurs. Mobile technology that taps into a connected village PC for free VoIP calls could present not only a lifeline to the outside world but a strong enough value proposition to prompt community or entrepreneurial investments in PC-based connectivity for longer-distance communications. TerraNet’s solution is also a reminder that multinational technology corporations doing business in developing countries would do well to look far outside traditional technology and business model solutions to understand competitive threats and accurately identify growth opportunties.

Also in the news:

• Motorola loses ground because of ultra low-cost segment
• Everex partners with Zonbu for low-cost laptop
• OLPC signs Peru for 260,000 laptops