The Business of Doing Business in Emerging Markets

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Executive SummaryEmerging markets accounted for approximately half of the world’s GDP in �006.1 They continue to demonstrate growth rates that far exceed those of the developed markets.� As a result, many companies see the ability to sell effectively to these markets as a key success factor.

1 Basis Gross Domestic Product based on Purchasing Power Parity (PPP) valuation of country GDP, IMF World Economic Outlook data, April �007� "World Development Indicators �007”, World Bank. http://siteresources.worldbank.org/DATASTATISTICS/Resources/WDI07section4-intro.pdf

However, the upside of emerging markets is tempered by other characteristics. The overall sales ecosystem in emerging markets often is complicated and quite different from that of a developed econ-omy. The markets are very diverse and their business environments and prac-tices are usually quite immature. They also have huge bases of low-income customers (both businesses and retail consumers) that coexist with a growing middle class.

Selling successfully to these markets requires a sales approach tailored to their unique characteristics. That means it is necessary to understand:

1) What kind of operating style to use.

�) How to grow sales channels that help achieve high performance.

3) How to sell to low-income customers.

4) How to deploy simple, standardized and global processes.

Through this article, we will explore the dynamics of the complex sales ecosystem in emerging markets and describe sample solutions that will help you structure a sales strategy for achieving high performance.

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The Astonishing Growth of Emerging MarketsAccording to the data in Figure 1, emerging markets accounted for 48 percent of global GDP in �006, up from 39 percent in 1980.3 The emerging world has witnessed growth rates that far exceed those of the developed world. Clearly the global balance is shifting in their favor. (See Figure 1.)

While many people have previously forecasted this shift,4 two recent trends appear to have added strength to this prediction:

• The BRIC (Brazil, Russia, India and China) economies have had impact sooner than expected.

• China and India are dominating the BRIC story.

Based on recent estimates, China and India will contribute �9 percent to the world GDP by �030. At the same time, the BRIC contribution will rise to 39 percent during that period.4

China and India Calling – A LotAccording to Gartner, China and India will each account for �0 percent of the global increase in telephone connections between �005 and �010. While growth in the developed markets is expected to be marginal (only contributing to 11 percent of global growth during �005–�010), emerging markets will contribute a whopping 89 percent to the global growth during the same period. By �010, telephone connections in emerging markets will be more than double those of the corresponding figure for developed markets. (Source: "Gartner Says Emerging Markets Hold the Key to Future Telecoms." Gartner. December 1, �006.)

IMF World Economic Outlook data—April �007

Figure 1: Who Contributes What to World GDP?Contribution to the World GDP (PPP Weighted)

1980

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40%

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60%

1985 1990 1995 2000 2006

Contribution to the World GDP (PPP Weighted)

OtherEmergingMarkets

China India Brazil Russia G7

3 "Dreaming With BRICs: The path to �050,” Global Paper # 99, October �003.4 Economist Intelligence Unit estimates, January �007.

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What CXOs Say About Emerging Markets Executives worldwide are responding aggressively to this changing market dynamic. An Accenture study of CXOs across Europe and the United States (�006) identified globalization as one of the key planks of corporate strategy in the �1st century. These executives, by an overwhelming majority, believe that the thirst for bigger markets (70 percent) and competitive threats (65 percent) are the key drivers of globalization.5

The term “globalization” has come to imply far more than far-ranging export activity or overseas research centers. Increasingly, it is associated with core revenue-building activities such as sales, marketing and manufacturing. An Accenture study of C-level executives

in communication and high-tech companies reveals that customer-facing roles are the most important in the corporate globalization effort.6 (See Figure �.) For companies to succeed in such roles, it is imperative that business leaders understand the sales context in these markets.

Figure 2: Customer-Facing Roles Are KeyFunctions/Processes Relevance to Organizations Globalization Effort

Nokia Nails New MarketsNokia’s sales from non-European or North American markets have grown from ¤�40 million in 1990 to ¤��.6 billion in �006. This constituted 55% of the company’s total sales. The bulk of Nokia’s growth is coming from markets like China, India and Brazil, where it is growing at rates above 35% year on year. (Source: Nokia annual reports.)

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Functions/Processes Relevance to Organization’s Globalization Effort

1st priority 2nd priority 3rd priority

CustomerFacing

R&D/ProductDevelopment

Marketingand Comms

Procurement/Sourcing

ManufacturingITSupplyChain/Logistics

HRFinance & Accounting

Management

5 Accenture research on high-performance businesses. (Results from survey of 3� CEOs. These CEOs belonged to communication and high-tech industries and were surveyed in Feb-March �006. The citation is a response by the respondents about the drivers of globalization.)6 Accenture research on globalization of communication and high-tech companies, April �006.

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Different Ways of Selling in Emerging MarketsAs customer-facing roles become more important, more is expected of sales organizations. However, the selling pro-cess in emerging markets often differs markedly from the sales methods typical in the developed world. Four factors are relevant. (See Figure 3.) It is useful to look at each in a little more detail.

Business Environments That Are Not Yet Mature. As attractive as emerging markets are from a growth perspective, the imma-turity of their business environments makes it challenging to do business successfully. The immaturity of the BRIC countries is reflected in World Bank rankings on “ease of doing busi-ness.” Of the 175 economies assessed, Brazil is at 1�1, India at 134, China at 93 and Russia at 96.7 These rankings

are much lower than developed mar-kets such as the United States and the United Kingdom, which stand at 3 and 6, respectively. Particularly challenging from the sales perspective are insuf-ficient distribution infrastructure and poor payment cycles. Entrants to these markets also have observed that many market factors are effectively unknown (and unknowable). Hence, corporations face steep learning curves before they develop the necessary understanding of local environment and customs.

Growth Rates That Can Skew Sales Goals. Growth rates in emerging markets are breathtaking. Gartner estimates that the Indian IT market grew by 31 percent in �006 alone. It further predicts that this market will maintain an annual growth rate of more than 15 percent through �0�0—a sharp contrast to mature markets such as the United States and the United Kingdom, where annual growth rates are in the 3 percent to 5 percent range.8 A high-growth phase may drastically alter an

organization’s sales objectives. Customer retention can take a back seat while all the focus shifts to acquiring new customers. Likewise, because of the high latent demand, sales teams may evolve into “order takers” rather than “sales generators.” Sales processes also tend to become outdated very rapidly in such dynamic business environments.

Myriad Low-Income Buyers and Small Businesses That Offer Huge Potential. Per-capita income is low in emerging market economies. Low-income cus-tomers also tend to be geographically dispersed (and thus difficult to reach); they are quite likely to live in villages or urban shantytowns and often have unsophisticated lifestyles compared to Western counterparts. The businesses that serve these consumers also tend to be small, and the markets may be much more fragmented than in developed economies. Yet it is these customers and businesses that offer huge potential to new market entrants.

7 Ease of Doing Business Rankings, Business Environment Indicators, World Bank, �006.8 Worldwide Black Book, January �007.

Figure 3: The Four Factors That Affect Sales in Emerging MarketSales Strategy Context

Sales Strategy Context

Large Base of Low Income Buyers & Small Businesses

Geographically Dispersed Markets

Explosive Growth

Immature Business Environment

Sales Strategy

• Low buying power• Fragmented markets

• Insufficient distribution infrastructure• Poor Payment cycles• Lack of local knowledge & customs

• Large populations spread over a huge geographical area• Cultural barriers• Lifestyle and language differences

• Sales objectives are different from developed world• Sales processes and systems are constantly under flux

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Figure 4: Hofstede’s Culture Scores on Individualism

Country Individualism (IDV)United States 91

United Kingdom 89

Germany 67

India 43

Brazil 38

China �0

World Average 43

Markets Within Markets Within Markets. China has a population of 1.3 billion spread over 9.6 million square kilome-ters.9 It contains distinct subpopulations with different dialects and varying life-styles. Likewise, the populations of India, Brazil and Russia are far from uniform. To serve these large, diverse markets, a broad-based sales network is necessary.

What It Takes to Sell Success- fully in Emerging MarketsAccenture observes that companies tend to wrestle with four overarching issues as they look to expand in emerging markets:

1) What kind of operating style to use

�) How to grow sales channels to help achieve high performance

3) How to sell to low-income customers

4) How to deploy simple, standardized and global processes

The answers to these challenges depend on many internal and external factors, but we have found several underlying themes common to most successful companies:

They Opt for “Personal” Over “Process” in Operating StylesEmerging markets tend to require an operating style that is personal rather than process driven. Additional (at times, even superfluous) manpower may bring about the “personal touch” that produces the extra dollar of profit. Figure 4 illustrates the importance of collectivism and the value of personal touch worldwide. Note that the United States and China fall on opposite ends of the spectrum.10

IDV refers to the degree to which the society reinforces individual achievement and interpersonal relationships. A lower value indicates a collective society; higher values represent societies that value a high degree of individualism. Higher scores on collectivism should have a huge bearing on corporations’ operating styles. In a more collective society, incentives can be more “team-based” than “individual-centric.” Likewise, in such societies of emerging markets, the importance of relationships, best represented in the Chinese word guanxi, cannot be overemphasized.

A strong collaborative approach is also seen in the way that corporations deal with competition or develop and leverage strong local networks. Such collaboration may take the form of cooperating with channel partners and suppliers—or even collaborating with competitors in noncompeting areas. The price of competition (extra marketing effort, sales effort, exclusive infrastruc-tures, etc.) contributes to higher costs and may create waste in the system. Collaboration potentially may reduce some of these costs. Additionally, col-laboration also may collapse time to market, which is an important success factor in emerging markets.

Help Me Help YouGuanxi is a central concept in the Chinese society that essentially refers to a “network of contacts” who help each other out in realizing their objectives, even if their actions violate existing rules and procedures.

My Infrastructure Is Your InfrastructureVodafone recently acquired Hutch, the second largest operator of Global System for Mobile (GSM) in India. One of the first public announcements made by Vodafone CEO Arun Sarin was in respect to sharing telecom network infrastructure with Bharti, Hutch’s biggest competitor. Clearly, market realities are forcing competitors to eat from the same plate.(Source: "All eyes on TRAI as Vodafone, Bharti talk infra sharing." The Economic Times. February 14, �007.)

9 http://en.wikipedia.org/wiki/China.10 Hofstede’s Dimensions of Culture—Individualism vs. Collectivism. http://www.geert-hofstede.com/hofstede_dimensions.php.

To Russia With MobileAn example from Russia: Samsung sells directly to Russia’s two largest mobile handset retailers—Euroset and OAO Vimpel Communications—and also partners with Bang & Olufsen. The telephones are sold through Bang & Olufsen outlets as well as select Samsung stores. (Sources: “B&O rings the changes with Samsung mobile technology,” Design Week. October 13, �005.

“VimpelCom To Sell Samsung Phones; Tariff Targets Women,” Dow Jones News Service. October 6, �005.

“Samsung to produce cell phones under Russia's Euroset brand,” Prime Tass. April �0, �006.)

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A fair amount of collaboration seems to occur in the area of enabling technologies. An example is Microsoft’s FlexGo11 technology program for subscription and pay-as-you-go computing models in emerging markets. This program has companies such as Intel, AMD, Infineon, Lenovo and Transmeta as partners. Microsoft envisions making low-cost, full-featured PCs available to millions of new users through tailored financing models that fits users’ lives and budgets.

They Select the Sales Channels That Suit Each Market BestCorporations often struggle to find the right balance between direct and indirect routes to market. Establishing a direct sales organization demonstrates a company’s commitment level to governments and to large corporations in emerging markets. Corporations frequently find that end customers want to receive service from the company itself rather than partners. Both of these factors have led many companies to establish at least a limited direct sales presence in emerging markets.

However, setting up a direct sales force to reach an entire market may prove to be quite costly and time consuming, at least in the initial stages of business. Given the size and dispersed nature of markets such as India and China, leveraging indirect channels is often the most cost-effective and timely way to reach large numbers of customers.

Indirect channels have no shortage of challenges of their own. Poor infrastructure, limited channel knowledge or sophistication, disabling regulatory conditions and lack of supporting payment mechanisms require new entrants to do more to grow and retain a strong indirect channel ecosystem. In our experience, corporations tend to work on an assured

ROI model (promising a particular ROI to the channel partners given a certain investment and process adherence) and invest in their partners through the following methods:

a) Deployment of channel-financing mechanisms to tide over poor payment cycles

b) Training of channel partners through classroom programs, certifications, hands-on training and field-level deployment of global best practices

c) Investment in channel marketing support

Channel partner management in emerging markets usually calls for a high level of hands-on support—that is, the need to deploy additional manpower, finances and processes. Effective partnering has a steep learning curve and comes with years of experience. One company that partners exceptionally well is Cisco. A few key elements of Cisco’s Channel Performance program1� are:

1) A $� billion fund that Cisco makes available to its partners through Cisco Capital, providing short-term inventory financing for channel partners in emerging regions.

�) A specialized team of channel account managers for engagements with channel partners in emerging markets, which has recently been enlarged by 40 percent and has undergone specialized training.

3) Regular seminars and training and certification programs for Cisco’s channel partners.

In other cases, direct and indirect sales models can be successfully combined in emerging markets. Nokia shows how. In India, Nokia13 sells through 90,000 points of sale, which are serviced through a combination of a national distributor, regional distributors and micro distributors. Sales transactions are

Reaching India’s Rural RetailersAn example from India: Motorola has ensured distribution deals with rural retail chains, specifically ITC’s e-choupal, DCM’s Hariyali Kisaan Bazaar and Godrej Agrovet. These initiatives will provide consumers the assurance of a direct channel to purchase new handsets, especially because the market is replete with gray market phones and refurbished units. (Source: "Mobile players target haats to push growth," The Economic Times. April �3, �007.)

11 “Microsoft Rolls Out Pay-As-You-Go Computing Models,” Electronic News , May 5, �006.1� “Cisco Capital Slates $�B in Financing for Channel Partners in Emerging Markets,” Channel Insider, December 13, �006. 13 “First Mover in Mobile; How Nokia is selling cell phones to the developing world,” BusinessWeek Online, May 4, �007.

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handled both by a direct sales force and by the distributors’ sales teams. However, the actual distribution of the handsets is carried out by the distributors only. This scenario is quite different from the situation of five years ago, when the company had a very limited presence and sold only through a national distributor.

They Find Smart Ways to Reach Low-Income CustomersA huge and growing middle class, together with a host of rapidly expand-ing businesses, gives the impression that easy success awaits in every emerging market. However, the durability of the success often is defined by the way a corporation reaches out to low-income customers, including retail buyers and small- and medium-sized businesses. This outreach frequently means selling products to unsophisticated buyers in geographically dispersed locations; it may involve developing a strong rural sales structure.

Successfully reaching out to low-income customers requires considering the specific characteristics of these markets when defining solution characteristics, access methods and customer touch-point management.

Specifically, companies need to develop solutions that appeal to low-income customers and small businesses. Examples may include factors such as “smaller ticket size” (for example, shampoo sachets instead of full bottles), no-frills solutions (for example, Intel’s “Community PC,” a low-end, no-extras machine)14 and monthly payments for high-value products. Simultaneously, access methods tend to become more dispersed and complicated. Low-income customers and businesses often respond well to localized, high-intensity promos rather than sustained national advertising. On the other hand, the SKU complexity that results from smaller-ticket items and specific solution characteristics will necessitate specific sales training.

It is often very useful to deploy funnel-type access methods to reach out across the broad geographical regions found in emerging markets. In such methods, many customers are reached through one access point at any given instance. An example would be retail stores that reach many customers at one time through one-stop shopping. The method is usually impersonal and needs a leg-up in terms of brand support to sell the product. Similar funnel-type access channels often are effective ways to work opportunities, support distribution and handle post-distribution support.

LG, Samsung and Nokia are reaching out to low-income customers in India in increasingly innovative ways. Distribution infrastructures have been shored up to connect even the smallest villages. These companies have achieved double-digit growth rates in emerging markets by using combinations of local distributors, access through local markets and deployment of local sales teams. LG, for instance, has ensured speedy access to credit (and also a system of equal monthly payments for its products) through tie-ups with banks to further facilitate sales to low-income customers. Similarly, Nokia has deployed a fleet of distinctive blue Nokia-branded vans that travel India’s country roads. These mobile advertisements are parked in villages, often on market or festival days. There, with crowds clustering around, Nokia representatives explain the basics of how mobile phones work and how they can be purchased. Distribution innovations like these have helped Nokia reach annual revenues of $3.7 billion in India.15

14 “The race is on to serve "the next billion" in emerging markets,” BusinessWeek, June 1�, �006.15 “First Mover in Mobile; How Nokia is selling cell phones to the developing world,” BusinessWeek Online, May 4, �007.

Kenyans Form “Buying Clubs”An example from Nairobi: A leading mobile company learned that many people form buying clubs, pooling their money to buy handsets one at a time until every member has one. The members draw lots to see who gets phones in what order. Now the company is looking for ways to encourage this form of self-financing. Communal finance is one way to sell to people at the bottom of the financial pyramid.

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They Strive for the Right Mix of Local and Global ProcessesLarge transnational corporations have developed robust sales processes over many years. However they repeatedly struggle to achieve the right mix of local and global in emerging markets. Often, many companies assume the more localized the better. In fact there are many stories that speak of how companies have failed by rolling out “global process” in emerging markets. Experience shows that the most successful answer tends to be a blended approach of local and global processes. We have found the most important areas to “localize” are the distribution channels themselves. Leveraging “global standards” for many of the back office procedures, sales methodologies and supporting technologies, on the other hand, has been proven to be very effective in providing some needed structure and operating efficiencies to these fast-growing markets.

One example of success comes from a large, high-tech company that expanded into both India and China using a global inside sales capability. Various sales and support processes, such as lead generation, account review and approach, reporting, problem escalation and repeat business generation, remained similar to global best practices. The only differences were local market expediencies such as communication methods (personal vs. impersonal), market information sources (formal vs. informal channels), review frequency, etc. The key idea was to establish a robust sales support that helped the organization to scale, react to the dynamic market and provide the right support at the right time to the sales force at the point of sale.

Emerging markets exhibit huge variability from place to place and from time to time. As a result, flexible sales processes become vital. For example, when a

global incentive structure or process is employed, companies must balance key sales objectives for sales volume, sales mix and new product sales in different scenarios (which are being played at the same time in different geographies). At 30 percent annual revenue growth rates, a company more than doubles its size in three years’ time. In such a scenario, companies would need sales processes that scale to support rapid growth as well as support systems that are sufficiently robust to function in a dynamic business environment.

Accenture’s recent work with one of China’s leading mobile telephone companies demonstrates this need very clearly. We helped the company to migrate to a more flexible and scalable channel management system that was particularly geared to manage China’s rapidly changing market dynamic. The management system defines sales objectives by flexible groupings of channel partners and customers. Sales processes have a built-in flexibility regarding objectives, incentives and timelines, with appropriate controls at all levels. This system, with its elasticity and inherent ability to react to market conditions, has allowed the company to respond much faster to changing business conditions than its competitors.

The Next Step Is YoursSuccess in emerging markets is rapidly becoming a critical success factor for global companies. The core challenge is to grow in a cost-effective and profitable way given the vast size of the markets, the differing economic and infrastructure capacities, and the variations in the markets’ cultures and customs.

The key, Accenture has found, is to start by adopting an appropriate operating style that leverages personal connections. The second step usually involves a demonstrated commitment to growing sales channels that help achieve high performance, which requires more intensive investment than in many developed countries. Success is ensured by sales outreach that targets low-income customers with appropriate offerings and access mechanisms. And it is accelerated when a company can localize customer-facing processes while building a strong and scalable foundation of back-end processes that rely on best global practices.

Today is a good day to begin rethinking your approach to emerging markets.

For more information contact cht_inquiries@accenture.com and reference “selling to emerging markets.”

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About Accenture Accenture is a global management consulting, technology services and outsourcing company. Committed to delivering innovation, Accenture collaborates with its clients to help them become high-performance businesses and governments. With deep industry and business process expertise, broad global resources and a proven track record, Accenture can mobilize the right people, skills and technologies to help clients improve their performance. With more than 170,000 people in 49 countries, the company generated net revenues of US$19.70 billion for the fiscal year ended Aug. 31, �007. Its home page is www.accenture.com.