Transcript of "Competing For the Global Middle Class"
strategy+businessISSUE 64 AUTUMN 2011Competing for theGlobal Middle ClassThree types of companies are jockeying for positionin emerging economies, seeking to capture the loyaltyof billions of new consumers.BY EDWARD TSE, BILL RUSSO,AND RONALD HADDOCKREPRINT 11309
Competing for the Global Middle Class by Edward Tse, Bill Russo, and Ronald Haddockfeatures global perspective 1
Three types of companies are jockeying for position in emerging economies, seeking to capture the loyalty of billions of new consumers. features global perspective 2Illustration by TK
Haier produces extra-large-capacity washers that can accommodate the robes of Middle East consumers and quiet, timer-equipped washers for Italians whose power rates are lower at night. Haier is not the only company that has transformed already developed products for their domestic middleitself to seek a share of the global middle-class market. markets. Now, they seek to expand their geographicIn a variety of industries — including consumer pack- reach and power, parlaying their existing capabilities features title of the article features global perspectiveaged goods, electronics, automobiles, medical products, and knowledge into serving the global middle class.and agricultural equipment — corporate leaders are dis- 3. Multinational incumbents are mature global com-covering that they must rethink their product and ser- panies, often from Japan, Europe, and the United States.vice lines, go-to-market strategies, and operating mod- They are intent on adapting their existing product linesels to build a presence in emerging economies. to capture the attractive growth opportunities in emerg- ing middle markets.Momentum in the Middle You can see all three types of competitors in mostThe first step toward becoming a leading company for the sectors in countries that are in the momentum phase.global middle market is recognizing the pace of develop- For example, in China’s automobile sector, local up-ment in the countries where you hope to do business. All starts are represented by players that have traditionallyindustrializing countries follow an “arc of growth”: an made low-cost cars, such as Chery Automobile Com-evolutionary path of economic change. They start as na- pany, Great Wall Motor Company, and Geely Automo-scent economies (emerging from subsistence, with large bile Holdings. They are moving up the product pyra-numbers of young people). They gradually evolve into mid. In 2010, Geely purchased the Swedish carmaker 65 4mature economies, with relatively flat growth and large Volvo from Ford at the bargain-basement price of $1.8numbers of aging people. In between, there is a critical billion and immediately raised production plans tostage of urbanization and economic momentum. Dur- 300,000 Volvos annually, almost double the previousing this “momentum phase,” many countries have large, worldwide production.relatively young populations and high economic growth Global aspirants in China’s middle market includerates. These countries are the seedbed of the emerging South Korea’s Hyundai Motor Company. Hyundai en-middle-class markets. tered China in 2002 and has since achieved remarkable Three types of corporate players are jockeying for success in the middle market with a major redesign ofposition in these markets: its Elantra model. 1. Local upstarts are companies that have tradition- Among the multinational incumbents are long-ally provided low-priced goods for bottom-of-the-pyra- established automakers aggressively seeking to carvemid customers in their home markets. They are migrat- out significant shares of China’s middle market. Theseing upward into their domestic middle markets as their include GM, with its Chevrolet Spark and Buickcustomers become more prosperous. These companies Excelle, and Volkswagen, with its Polo and Golf models.now provide products and services with more features, All of these multinationals pursue this market throughbetter quality, and increased brand status. joint ventures with Chinese partners. For example, the 2. Global aspirants are local companies that have Guangzhou Automobile Group makes Honda-branded
dustry, have become global aspirants. In 2008, LiuGong sires. As Pankaj Ghemawat, professor of global strategyopened a factory in India. In 2009, Sany announced it at IESE Business School, notes in World 3.0: Globalwould invest €100 million ($144 million) in an R&D Prosperity and How to Achieve It (Harvard Businessand manufacturing center in Germany; it also has ma- Press, 2011), there arejor plants under construction in the U.S. and Brazil. Incumbent construction equipment makers, such numerous casual examples of cultural differ-as South Korea’s Doosan Infracore, Japan’s Komatsu, ence [in consumer products]…. The Czechsand U.S.-based Caterpillar, are aggressively targeting drink way more beer than people in Saudi Ara-the Chinese middle market as well. Caterpillar’s stated bia, and even more than the Irish, who come ingoal is to become the top brand in its sector in China by second. Pakistanis google sex more often than2015. In the 1990s, the company was focused on devel- any other national population, just slightlyoping government relationships to facilitate sales of its more than the Vietnamese and far more than features title of the article features global perspectiveexisting product lines. But as the middle market heated the Irish and Czechs. Eritreans google god theup, Caterpillar found its market share squeezed by Japa- most as well as figuring in the top five nation-nese and Korean competitors and rising local players. In alities searching for sex. India and China arethe late 2000s, Caterpillar’s leaders recognized that the so close geographically that they still haven’tcompany’s traditional product line and business model resolved their territorial disputes, but couldn’twere not adequate for China. It lowered its cost base display more distinct food cultures, particu-through the establishment of local R&D centers and larly around which animals and parts of ani-through the acquisition of Shandong Engineering Ma- mals should or shouldn’t be eaten. Argentineschinery, a leading Chinese wheel loader manufacturer. see psychotherapists more than other nationali- Just as countries evolve over time, so do companies. ties, and Brazilians spend a higher proportionMany of today’s local upstarts will be global aspirants of their income on beauty products than thetomorrow; today’s global aspirants often become multi- citizens of any other major economy.national incumbents. The differences among them ap-pear primarily in the way they choose to compete, and To successfully serve middle-market customers, 67 6in the level of resources that they use to enter a market. companies must identify which product attributes theThe more intelligent they are about their approach, the customers in a specific market value and don’t value.more likely they are to move to the next level. Unfortu- Then, they must either add those attributes to or cullnately for the incumbents, local companies are increas- them from their existing products. Ghemawat uses theingly intelligent about the way they make the transition, examples of McDonald’s, KFC, and Coca-Cola, all ofusing joint ventures or regional expansion to gain the which vary their products geographically: Coke, for in-experience they need to compete on a larger scale. stance, uses cane sugar as sweetener in some countries and corn syrup in others. This type of variation addsA More Complex Market complexity across product and marketing mixes, and inThe world is far from homogeneous. The buying power, all the operations and functions related to them. It canneeds, and desires of the middle classes vary by nation require much extra expense and attention from com-and region. In developing nations, for example, middle- panies, especially those with heavily centralized, scale-market customers are seeking products that have some driven business models.of the premium features and quality that customers in But companies that seek leadership positions indeveloped nations are used to, but at lower price points. their industries may have little choice but to pursue theFurthermore, customers in each geographic market are global middle market. The developed middle marketsdrawn to buy products that fulfill local needs and de- are a huge and indispensable source of sales volume,
In emerging economies, producers tend to rely on a simpler value chain, with more of it located in low-cost countries, which reduces costs and boosts margins. and market share can decline precipitously as local emerging economies. upstarts or global aspirants redouble their efforts. In Reality: It may already be too late. The competi- most of these markets, competition is already intense: tive collisions between local upstarts, global aspirants,features managementfeatures global perspective Companies track their market share gains and losses and multinational incumbents are occurring at differ- in tiny increments — a point or even a fraction of a ent speeds in different industries, and some industries point at a time. In addition, most developed middle are already becoming saturated with competitive rivals. markets are driven more by the rise and fall of mac- In major appliances, for example, most countries now roeconomic cycles than by underlying fundamentals, have offerings from Haier (which not long ago was such as an unusually fast-growing customer base. This an upstart); South Korea’s LG and Samsung (which means that during the stable parts of the cycle, the gains were recently considered global aspirants, but now that new players make will come out of the pockets operate as full-fledged global incumbents); and GE, of incumbents. Whirlpool, and Electrolux (multinational incumbents The global middle market is also spawning game- trying to win share in emerging middle markets and changing new products that can migrate to and even- defend their shares in the mature middle markets of de- tually threaten the status quo in developed markets. veloped nations). Tuck School of Business at Dartmouth College profes- The fortunes of companies will be made or lost de- sors Vijay Govindarajan and Chris Trimble have coined pending on the timeliness of their entry into the emerg- 68 7 the phrase reverse innovation to describe the process ing middle markets. If the current pattern holds true, by which products designed for developing economies those that fail will likely become the acquisition targets become hits in developed economies because they fill of global aspirants. This has already happened to some undiscovered needs and desires of customers in those carmakers, such as Volvo and Saab. Midsized domestic nations. (See “How to Be a Truly Global Company,” by companies in developed markets will also become tar- C.K. Prahalad and Hrishi Bhattacharyya, s+b, Autumn gets as new competition enters their home markets and 2011.) their home markets become an ever-smaller percentage of the global middle market. Myths and Realities Myth: We can’t make money in the middle markets Because the case for pursuing the global middle mar- of emerging economies. ket is compelling, and the complexities are daunting, it Reality: Yes, products aimed at the middle classes of is understandable that many senior executives at major developing nations are usually priced 20 to 40 percent strategy+business issue 64 consumer and industrial product companies are am- lower than their counterparts in developed nations. But bivalent about — or even resistant to — the idea. Their in emerging economies, lower prices do not necessar- resistance, however, should be reconsidered. It is usually ily mean lower profits, because the sales volume is po- based on one or more of the myths below. tentially two to three times greater than the volume in Myth: It’s too early to enter the middle markets in more mature markets. Multinational incumbents need
to develop the capability to profitably address consum- that can rapidly turn middle-market customer insightsers in these price segments, because that is often where into products and services is another key to success.emerging competitors gain their initial foothold. The manufacturing footprint will likely expand in Moreover, the cost of making products tends to be many companies as the number of products designed forlower in emerging economies than in mature markets. specific middle markets begins to grow. In lower-incomeThese products usually have fewer premium features markets, manufacturing processes may need to empha-and often, as with the smaller engines in Volkswagen’s size volume and efficiency over customization. FartherPolo and Golf, have less-expensive parts. The produc- back in the value chain, suppliers will be rewarded forers of these goods tend to rely on a simpler value chain, minimizing complexity and meeting the value and costwith more of it located in low-cost countries, which also expectations of middle-market customers.reduces costs and boosts margins. Finally, companies Marketing will need to identify distinct middle-earn additional dividends in shareholder value as they class markets and gain an intimate understanding ofexpand into new, higher-growth markets. the customer segments within each one. It will have to Myth: We don’t need to alter our products — we craft and effectively communicate tailored value propo-just need to educate our customers. sitions that don’t undermine more expensive offerings, Reality: In the near term, many newly minted mid- especially when they bear the same brand names. Salesdle-class consumers cannot afford developed-market and service will need to be rightsized for each marketproducts no matter how much they might value them. — often, this will entail more of a self-serve approach features title of the article features global perspectiveAs the middle classes mature and their purchasing that keeps costs low.power grows, this will change. Nonetheless, custom- For executives of multinational corporations, iters in countries such as India, Brazil, and Turkey will may take a change in the conventional business mind-continue to want distinctive features and options. Many set to tap into global middle markets effectively. Theof their needs, wants, and tastes stem from unique cul- most successful companies are establishing new busi-tural or environmental conditions, and are unlikely to ness units; rethinking their decision rights and otherchange soon. practices; and giving their leaders the freedom, author- Too often, companies try to create middle-market ity, financial resources, and talent needed to developvariants of higher-priced products by subtracting a few and run these businesses. The opportunities in thefeatures and pushing them through the existing busi- global middle market are worth the effort. +ness model and value chain. This results in compro- Reprint No. 11309mised products at overly high prices. The better alterna-tive is to rethink the value chain entirely. For example, Resourcesthe papermaking machinery industry in China is a 69 8rapid-growth, low-margin sector with many local up- Pankaj Ghemawat, Redefining Global Strategy: Crossing Borders in a Worldstart competitors. Multinational incumbents that want Where Differences Still Matter (Harvard Business School Press, 2007): A highly effective approach to global strategy, one middle market at a time.to enter this market must provide integrated manufac- Vijay Govindarajan, Jeffrey R. Immelt, and Chris Trimble, “How GEturing packages, including fiber systems, environmental Is Disrupting Itself,” Harvard Business Review, October 2009: Describessolutions, automation, and rolls and fabrics. To accom- reverse engineering in GE’s medical systems business.plish this, they often build their capabilities through ac- Ronald Haddock and John Jullens, “The Best Years of the Auto Industryquisitions and partnerships. Are Still to Come,” s+b, Summer 2009, www.strategy-business.com/ article/09204: The global middle-market opportunity in motor vehicles. Myth: Entering the global middle market will betoo disruptive to our operations. Richard Shediac, Rainer Bernnat, Chadi Moujaes, and Mazen Ramsay Najjar, “New Demographics: Shaping a Prosperous Future as Countries Reality: Companies need a business model suited Age,” Booz & Company white paper, May 2011, www.booz.com/media/to the task. The R&D function, for example, should uploads/BoozCo-New-Demographics.pdf: The underlying dynamics thatavoid innovation races and the creeping elegance associ- have created the global middle class.ated with sophisticated and expensive products. Instead, Edward Tse, The China Strategy: Harnessing the Power of the World’s Fastest-Growing Economy (Basic Books, 2010): How to successfully entertake a more local approach to innovation, designing one of the largest global middle markets.products for specific markets. The products can then For more on this topic, see the s+b website at:flow elsewhere, finding support and additional markets www.strategy-business.com/global_perspective.wherever they strike a chord. Investing in local R&D