But companies that seek leadership positions in their industries may have little choice but to pursue the global middle market. The developed middle markets are a huge and indispensable source of sales volume, and market share can decline precipitously as local upstarts or global aspirants redouble their efforts. In most of these markets, competition is already intense: Companies track their market share gains and losses in tiny increments — a point or even a fraction of a point at a time. In addition, most developed middle markets are driven more by the rise and fall of macroeconomic cycles than by underlying fundamentals, such as an unusually fast-growing customer base. This means that during the stable parts of the cycle, the gains that new players make will come out of the pockets of incumbents.
The global middle market is also spawning game-changing new products that can migrate to and eventually threaten the status quo in developed markets. Tuck School of Business at Dartmouth College professors Vijay Govindarajan and Chris Trimble have coined the phrase reverse innovation to describe the process by which products designed for developing economies become hits in developed economies because they fill undiscovered needs and desires of customers in those nations. (See “How to Be a Truly Global Company,” by C.K. Prahalad and Hrishi Bhattacharyya, s+b, Autumn 2011.)
Myths and Realities
Because the case for pursuing the global middle market is compelling, and the complexities are daunting, it is understandable that many senior executives at major consumer and industrial product companies are ambivalent about — or even resistant to — the idea. Their resistance, however, should be reconsidered. It is usually based on one or more of the myths below.
Myth: It’s too early to enter the middle markets in emerging economies.
Reality: It may already be too late. The competitive collisions between local upstarts, global aspirants, and multinational incumbents are occurring at different speeds in different industries, and some industries are already becoming saturated with competitive rivals. In major appliances, for example, most countries now have offerings from Haier (which not long ago was an upstart); South Korea’s LG and Samsung (which were recently considered global aspirants, but now operate as full-fledged global incumbents); and GE, Whirlpool, and Electrolux (multinational incumbents trying to win share in emerging middle markets and defend their shares in the mature middle markets of developed nations).
The fortunes of companies will be made or lost depending on the timeliness of their entry into the emerging middle markets. If the current pattern holds true, those that fail will likely become the acquisition targets of global aspirants. This has already happened to some carmakers, such as Volvo and Saab. Midsized domestic companies in developed markets will also become targets as new competition enters their home markets and their home markets become an ever-smaller percentage of the global middle market.
Myth: We can’t make money in the middle markets of emerging economies.
Reality: Yes, products aimed at the middle classes of developing nations are usually priced 20 to 40 percent lower than their counterparts in developed nations. But in emerging economies, lower prices do not necessarily mean lower profits, because the sales volume is potentially two to three times greater than the volume in more mature markets. Multinational incumbents need to develop the capability to profitably address consumers in these price segments, because that is often where emerging competitors gain their initial foothold.
Moreover, the cost of making products tends to be lower in emerging economies than in mature markets. These products usually have fewer premium features and often, as with the smaller engines in Volkswagen’s Polo and Golf, have less-expensive parts. The producers of these goods tend to rely on a simpler value chain, with more of it located in low-cost countries, which also reduces costs and boosts margins. Finally, companies earn additional dividends in shareholder value as they expand into new, higher-growth markets.