Scaling the Tail: Managing Profitable Growth in Emerging Markets

Managing Profitable Growth in Emerging Markets

Seung Ho Park, Gerardo R. Ungson, Andrew Cosgrove

• Publisher: Palgrave Pivot
• Year: 2015
• Print ISBN:
  9781137543530
• eBook ISBN:
  9781137538598
• Topic: Business
• Subtopic: International Business
• Index: Business

This book presents a framework for a different type of profitable growth for multinational companies in emerging markets: "scaling the tail." This model focuses on specialized market niches, flanking particular segments and product-categories, developing deeply nuanced localization strategies, and installing supportive management systems.

Part I

What Distinguishes Emerging Markets Today?

1

Introduction

Abstract: This chapter provides an overview of our core arguments. Although profitable growth is widely acclaimed, there are differences on how to approach it. Traditional strategies for emerging markets emphasize entering large and undifferentiated markets, recalibrating products to make them more attractive and affordable for targeted segments, and capitalizing on economies of scale and scope to reduce overall costs. Our research indicates that this approach is limited, if not misplaced, when addressing the emerging needs of affluent middle-class sectors. An alternative logic focuses on building mass sales at the periphery of the distribution using broad differentiation strategies. This is developed with select partners as an overarching theme throughout the book and supported by field interviews and a survey of consumer goods in select Asian countries.

Park, Seung Ho, Gerardo R. Ungson, and Andrew Cosgrove. Scaling the Tail: Managing Profitable Growth in Emerging Markets. New York: Palgrave Macmillan, 2015. DOI: 10.1057/9781137538598.0008.

Introduction

Profitable growth is a term in good currency. It is increasingly recognized as a powerful concept to describe sustained competitive advantage in market economies. After all, a firm that consistently posts high profits and sales growth over an extended period is considered to be the gold standard in both developed and emerging markets.

From previous studies, the strategy for achieving profitable growth in emerging markets has been the time-tested mantra employed by successful multinationals: enter large and relatively untapped mass consumption markets, recalibrate products to make them more affordable for these targeted segments, capitalize on economies of scale and scope, bring experts from the home country and hire local talent, and develop formidable supply chains to assure efficient distribution. The logic is simple: unleash the full power of a business model geared toward achieving market dominance through products that are affordably priced and reaping high profits through high volume sales over time.

But, as this book will detail, this strategy has not been effective as of late. The key problems include stronger local competition, difficulty in scaling up operations, failure to overcome the high transaction costs, inability to secure proper logistics and distribution, intensity of foreign competitors, unsupportive government regulations, and unanticipated responses by targeted affluent consumers to commodity offerings. All of these were underestimated by many multinational firms that adhered to the old practice of providing lower-priced commodities in mass consumption markets on a large scale.

What precipitated this change in outcomes? Why does the strategy that had worked so well in the past is largely ineffective in this current context? The failure to adapt is not due to a lack of resolve, nor is it the absence of strategic intent or good intentions. It arises from a significant shift in the market environment that has reduced the efficacy of a large scope—low-cost strategy. This problem is particularly manifest in strategies that attempt to capture market share from the fast-growing yet previously nascent segments, most notably the middle-class sectors in emerging markets, particularly in the BRIC (Brazil, Russia, India, and China) countries. Specifically, the wellspring of new market niches has created an uneven level of economic development that is clustered in different cities and regions, a context that McKinsey has ascribed the popular moniker “granular growth.”¹ In a global context, this disparity between high and low growth and development has been referred to as a “multispeed” world.² In this study, we argue that new consumption preferences by these fast-developing market sectors do not align well with the established practice of mass consumption applied to merchandising.

As will be detailed in this book, the evolving state of these preferences has led to what appear to be paradoxical, even conflicting, imperatives and modalities. These changing patterns call into question whether mass consumption lodged in the logic of manufacturing applies to the unmet needs and expectations of an emerging middle class. Likewise, this raises new challenges within emerging markets as to whether a single strategic approach to profitable growth is still appropriate, or whether multiple strategies oriented at mainstream and peripheral products have become the new norm.

In all, these recent developments prompt answers to several new questions. What new characteristics of the changing competitive landscape warrant more detailed attention? How can current and aspiring firms position themselves in this new environment? What new strategic templates should be adopted, and what should be discarded? How can a firm respond more effectively to surging market niches in the context of granular growth?

Clearly, a new business model is needed, but what type of model?

Framing a new business model

This book presents a different model of profitable growth, “scaling the tail,” that extends recent theoretical advances in value-creation. It has long been asserted that mass sales occur at the center of the statistical (normal) distribution, while sales in the periphery (or the tail) are regarded as fragmented and less significant. In a provocative reformulation, Chris Anderson (The Long Tail) reversed this logic by arguing that peripheral sales now outnumber traditional mass sales, primarily because digital technology has changed the economics of how goods are produced, stored, sold, and distributed, giving rise to the term “the long tail.”³ Even so, sales at the long tail, while large in the aggregate, remain fragmented and episodic.

For close to two years, researchers from the Institute of Emerging Market Studies (IEMS),⁴ working in tandem with a counterpart group from EY, deliberated on the subject of profitable growth. Our discussions led to several in-depth interviews with leading global managers from different emerging markets in Asia, principally to better understand the dynamics of profitable growth. However, because our conclusions regarding the “scaling of the long tail” were still preliminary and based mainly on the experiences of highly successful firms, IEMS and EY designed a cross-sectional survey of 276 managers in 10 emerging markets with a wider performance range. The ensuing study was conducted under the auspices of a collaborative EY team and the Economist Intelligence Unit. Collectively, the data form the basis for our ensuing arguments and reformulations.

Placed in the context of a total argument, our extension of current theory advances the following thesis: sales in the periphery are not simply aggregated, but they are contiguously interconnected as well, leading to scaling effects of their own. This condition is particularly evident in the branding strategy of the consumer goods and retailing sectors that targeted fast-developing sectors, such as the middle class in emerging markets. We term this “scaling the tail.”

In building the case for “scaling the tail” through interconnectedness, as opposed to simple aggregation, we provide fine-grained insights into how performance by firms in the consumer goods and retailing sectors⁵ is differentiated by their abilities to nurture specialized market niches using high-end brands, flank particular segments with multiproducts, build synergies from product categories, manage granular growth, develop deeply nuanced localization strategies, and install performance-based cultures with supportive management systems.

On the basis of these considerations, a prescriptive framework—the P (positioning), E (exploring strategic drivers), and C (co-aligning management systems)—was formulated to further guide our inquiry about profitable growth. In these deliberations, “scaling the tail” constituted the overarching theoretical anchor. This framework became the organizing logic for subsequent analysis of the cross-sectional survey and for synthesizing our findings with our earlier interviews.

For perspective, this chapter provides an overview of the entire study, highlighting key findings and conclusions. Chapter 2 reviews developments relating to profitable growth in emerging markets, culling from the established literature, including those from our earlier work (Rough Diamonds). Chapter 3 brings to the fore the specific challenges and questions arising out of unresolved questions and issues from established research. We also discuss key changes in the external environment with an emphasis on the middle-class sectors in emerging markets, which led to defining new inflection points that change the directionality of a strategy. In Chapter 4, we formally introduce the main theoretical components of a new business model (“scaling the tail”) that proposes a progression of value-creation within the lifecycles of product innovations. Chapter 5 introduces and builds further on the organizing logic of the “P-E-C” framework, which was used to guide and organize our findings and conclusions from the field survey. The next three chapters (Chapters 6–8) present our survey findings and insights from the interviews that delineate differences between higher and lower performing firms in their positioning strategies, their competitive drivers to achieve advantage, and the co-alignment of their management structures and processes with their strategies. In all, these chapters present suggestions for selecting high niche markets, defining strategic drivers and scaling opportunities, and elucidating the focal points motivating investment decisions and the cues for building a resilient profit-oriented organizational culture. The final two chapters (Chapters 9–10) present our overall conclusions and recommendations for multinational firms in emerging markets to attain profitable growth.

Our interest in profitable growth began in parallel with an initial project (Rough Diamonds) that detailed exemplary breakout firms in the BRIC countries.⁶ In this work that spanned five years, the IEMS team identified and examined breakout firms that had previously been shielded from the popular press and the academic limelight, but...

Table of contents

• Cover
• Title
• Part I  What Distinguishes Emerging Markets Today?
• Part II  Scaling the Tail: New Templates
• Part III  The P-E-C Framework
• Appendices
• Bibliography
• About the Authors
• Index