Why Do Firms Fail in Emerging Markets?

It is well accepted that emerging markets like BRIC countries represent a huge present and future opportunity for growing the business. Thus, many companies are entering into those markets. Unfortunately, not all organizations are able to show off that they are growing as it was planned. So let us review why do firms fail in emerging markets like Brazil:

Focus on what we need (increase sales) rather than in which customers need

Our financial goal can be to increase sales, but we must maintain customer focus. We should not assume that because our products fulfill global needs and are selling properly in some developed countries, those are going to work properly in emerging countries. We should ask ourselves: What are customers’ needs? And what is customers’ behavior (in emerging markets)? So, we will likely realize that customers in those countries buy with a different mindset. E.g. In Europe, it is much more likely to find customers that buy products according to “Product Life Time Value” than in Brazil that prefer list price to make purchasing decisions.

Market research focuses on the size of the opportunity and “neglect” product and price market constraints

There are still companies in B2B markets that pay much attention to sales and much less on marketing. So, some firms wrongly leave product introduction project on the hand of not very experienced marketing people. Having a deep study of how our products and prices fit the market is so important.

Decision-makers and influencers with lack of understanding of emerging markets

We can find that decision-makers have been historically located in Europe or North America headquarters. Some of them have never lived or even been in any of those markets, and they use their own country mindset.

“Global product strategy” rather than “fit to market strategy”

We have listened many times: “be global, act local.” However, there are still many companies that executing their global strategy (for instance reduce complexity,) they kill the necessary “fit to market strategy.” E.g. In the automotive industry in Brazil, customers prefer mechanical engines, so offering just electronic engines in order to have a global product strategy means give up a huge potential customer base.

Not understanding the “good enough segment”

Important growth in emerging markets comes from that segment. Good enough segment expects reliable enough products at low enough prices. I mean enough quality at affordable prices that still generate profits. Moreover, this segment is important to achieve economies of scale that will allow us to access to competitive price levels. E.g. In the automotive industry environmental regulation for emerging countries have a few years of delays. Trying to reduce product complexity having the same product for Europe and Brazil means increase features and prices that push us out of the “good enough segment.”

Not understanding “growth strategy” implications

In order to grow, firms need to invest. Some companies get in dead-circuit because they want to grow and get short-term profitability, and both strategies used to be incompatible in the short-term. Indeed, growing means investing (facilities, stock, days of sales outstanding, sales force, and so on,) and just a few industries allow firms to materialize profits in the short-term. Many of the successful firms that entry in emerging countries have invested strongly during years before getting the expected return. Other companies think that the important is just to fulfill their global footprint, and they invest shyly (probably one salesman by-product or vertical industry). In this last case because the investment is not enough, it will take very long time to get the return on investment, and firms could lose the patient and enthusiasm for those markets.

“Problems are OUT (of the firm) approach” rather than “problems are INSIDE (of the firm) approach”

The arrogance of some people/companies does not allow them to realize that they have many improvement opportunities inside. Those companies blame to market, customers, and so on. Many times, those people are bad listeners, and therefore people with low customer orientation. Moreover those people with a limited view of the problem cannot take advantage of the “power of AND” when trying to solve problems. So, they think in terms of OR. For instance, rather than improve the firm processes to be more competitive AND solve the market price issues, they think that the solution is lost money OR to increase even more the list price.

Measure success perceptually (%) rather than in euros/dollars ($)

Controllers can kill growth initiatives because those initiatives do no reach a percentage of net margin. Indeed, those initiatives can have a positive net margin, an important contribution margin, and support market share growth during the market penetration stage.

Not pursue costs saving aggressively

There are huge global corporations that are losing market share because they created in the past huge facilities (with several thousands of employees) difficult to manage properly. Those plants have very limited flexibility, diseconomies of scale, and massive overheads. Again, we have the risk of controllers assuming wrongly that current cost structure is correct, and suggesting “rationalizing” products, customers or markets.

Assuming that managing more value activities means creating more customer value and profitability

Some organizations decide to enter emerging markets and be focused on sales development. So, they use resources to grow quickly, and they take advantage of local partners and outsourcing activities. Other firms decide to invest at the same time in sales and building other capabilities. For instance, there are companies that have a distributor business model, but those firms try to add assembling/manufacturing capabilities to the distributor business model to generate more customer value and be more profitable. Nevertheless, they deviate resources from sales development to assembling/manufacturing, and because at the beginning there are not enough sales, the assembling facilities do not get economies of scale to compete. So, they face two problems at the same time: low sales and lack of economies of scale in production.

It is important to highlight that many of those causes are interrelated. So, companies failing in emerging markets are quite often affected by several of those causes, which increases even more the probability of failure in the emerging markets.