Monday, August 20, 2007

Five Rules for Winning Emerging Market Consumers
By James A. Gingrich

Multinationals need a disciplined approach to selling in emerging markets. They can't launch consumer products with a scattershot approach.

I would like to thank Jose-Luis Bretones from McDonald’s for alerting me to this article. I suggest going to the site and reading it in full. The following are excerpts that highlight the key learnings. The article is written in the context of consumer goods companies but I think the lessons learned are universal. My last two years at DuPont were spent deploying the Market Driven Growth (MDG) process in emerging markets. We found many of the same dynamics for industrial products –innovation across the full business design was critical!


Western Europe, Japan and the United States have been the engines powering the world's economy since World War II. That is no longer the case. Emerging and developing economies, on a purchasing parity basis, now total 44 percent of the world's economy, and in the last decade, emerging nations were responsible for two-thirds of the world's economic growth. The consumer base in these economies already measures in the hundreds of millions, is young and is growing three times as rapidly as in the developed world. As recent events have demonstrated, what happens in these economies affects us all.

Given these trends, multinational corporations face profound changes in the economic landscape. Over the next 10 to 15 years, most of the total world growth in consumption of consumer goods will likely be concentrated in the largest of the developing economies. In that time span, these strategic emerging markets will grow to be comparable in aggregate size to the Group of Seven leading industrial nations (the United States, Japan, Britain, France, Germany, Canada and Italy). The future scale and growth of global consumer businesses is dependent on their success in building strong positions in these new, challenging markets.

There are a handful of consumer goods companies that have already demonstrated the potential contained within the big, emerging markets. Companies such as Unilever, Coca- Cola, Gillette, Nestlé and Colgate- Palmolive all now capture one-third or more of their revenue from these markets, with profitability equal to, or higher than, what they achieve in developed economies. For example, the Coca-Cola Company now derives 37 percent of its revenue from Latin America, Africa and Asia, and these markets contribute a stunning 49 percent of its operating profits. Similarly, the Colgate-Palmolive Company receives 45 percent of its revenue from these same markets and nearly half of its operating income. …….


The success enjoyed by these pioneers, however, is not the norm. The largest group of multinationals has followed a flag-planting strategy: transplanting existing "first-world" products with minimal investment into a wide variety of new markets, without achieving significant market share in any of them. While multinationals are quick to cite the extent of their worldwide footprint, the global portfolio of most multinationals remains dominated by United States and Western European economies. The emerging markets combined in the portfolio of flag-planters are typically limited to less than 10 percent of their worldwide sales. Given their timid positions and weak understandings of these countries, the returns of those who have followed the "flag-planting" route are generally poor.

While there is a natural tendency for multinationals to build upon what made them successful in their core markets in Western Europe and the United States, it is this practice that routinely gets them into trouble. In reality, consumer goods companies cannot export their business models, products and marketing formulas wholesale from their core developed markets and expect them to work in places such as India, Turkey or Mexico. Emerging markets differ in their governmental policies, regulations and macroeconomic behaviors; in the structure of their consumer markets, distribution systems and competitive sets; in the needs and behaviors of their consumers……….

Late last year, Niall W.A. FitzGerald, chairman of Unilever P.L.C., summarized the challenge facing Western consumer businesses when he said, "The real action is increasingly going to be in the developing and emerging markets. Business should not be so mesmerized by the current economic difficulties in these markets that companies ignore the enormous long-term economic potential. However, realizing that potential will not be easy. It will not only require a greater emphasis on understanding what are the needs of the consumer, but a radically different way of approaching them."


1. Reach the masses: Manage affordability
When we discuss the consumer base in emerging markets, however, we need to recognize that it is still significantly poorer than the consumer base of the Group of Seven industrial nations. Middle class in the big, emerging countries is typically a family earning $3,000 to $10,000 a year when measured in equivalent purchasing power. There is an even larger mass of the population below this income level that is also prepared to spend, albeit selectively. Only a small fraction of the population of countries such as Turkey or India are well-to-do, middle class by American standards. For example, hypermarkets in Poland have captured only about 12 percent of the market there since they cater only to the portion of the population with cars. Most retailing in Poland is still done in local shops that people can reach on foot.
Reaching the masses frequently means that …. companies need to rethink their product lines with a sharp eye on the price/performance equation

2. Be ubiquitous: Invest in distribution
Finding cost-effective ways to build broad and deep sales and distribution coverage in the emerging markets is one of the most critical challenges facing consumer products companies. This can rarely be done on the cheap. Alliances with local producers that agree to provide distribution rarely work. Multinationals should also be cautious about relying too heavily on broad-line wholesalers/distributors in many of these countries.

3. Create desirability: Build strong brands (in our MDG work in emerging markets, we found it advantageous to first build a strong brand position in the top tier of the human pyramid and then take it down realizing that the offering had to be changed to meet the different price/value tradeoffs)

Interestingly, despite the limited financial means of the emerging market consumer, branding could well be more important in these markets than it is in markets such as the United States or Western Europe. In part, this is due to the aspirational attraction that strong brands have for lower-income consumers, particularly in "badge" categories. For instance, the number of lower-income consumers on the streets of Sao Paulo or Shanghai wearing $100 jeans, a price that represents a month's wages, is striking. ……….

A fact of life in almost all emerging markets is that multinationals will face competition from local entrepreneurs whose informal operating practices, such as tax evasion or selective attention to labor laws, secures them a large cost advantage. Brand equity becomes an essential weapon in defending market position in the face of this type of competition…….

Because the investment required to build and support a brand in these markets is high compared with the small size of many categories, companies should carefully weigh using umbrella brands in emerging markets as a means to create scale, particularly when exploring new categories.

4. Play to win: Pick your fights well
Multinationals must play to win in the emerging markets. Too many companies fool around in the high end of these markets and remain timid about investment. Rather than shielding these companies from losses, this flag-planting strategy only exacerbates them.

Emerging markets are no different in this respect from the United States or Western Europe. Consumer goods multinationals must build leading or strong No. 2 positions in their target categories to be profitable over the long haul. Further, getting to critical mass is vital, given the sizable minimum investments necessary in brand-building and sales, distribution and production infrastructure. Scale and the demonstration of long-term commitment also create an environment that is attractive to scarce local management talent. Dabblers in these markets should either get serious or get out.

5. Be local: Foster emerging-market entrepreneurs
The extreme volatility and unconventional business methods in emerging markets require different management skills than are needed in mature, Western markets. For emerging market managers, raging inflation, currency swings, new taxes, continually changing business regulations and interest-rate instability are all part of the normal macroeconomic environment……….

For managers who are unaccustomed to such an environment, the ride can be pretty wild. It can also be expensive for their parent companies. This is why the most experienced emerging market multinationals generally have strong country managers who generate significant value through their entrepreneurial spirit and intimate understanding of the local environment. They are provided with the right global support and the freedom to make decisions quickly. This ability to be more agile in the turbulent emerging-market environment is a significant competitive advantage.

Monday, August 13, 2007

P&G's Global Target:
Shelves of Tiny Stores
It Woos Poor Women
Buying Single Portions
Mexico's 'Hot Zones'

July 16, 2007; Page A1

One of the greatest sources for organic growth is in developing markets. The key is business design innovation not just product or service. This is a great article describing how one of the giants tackled the many challenges . One of the many critical learnings is: "To ensure satisfactory profit margins, P&G uses what it calls "reverse engineering." Rather than create an item, and then assign a price to it -- as in most developed markets -- the company first considers what consumers can afford. From there, it adjusts the features and manufacturing processes to meet various pricing targets."

LEÓN, Mexico -- Every day, Martina Pérez Díaz spends about five hours sewing 70 pairs of black loafers by hand for a wage of 120 pesos, or about $11. When she wants to wash her hair, she walks to her local tiendita, or "small store," to buy a 0.34 ounce, single-use packet of Procter & Gamble Co.'s Head & Shoulders shampoo. The price: two pesos, or about 19 cents. "That I usually can afford," she says.

Shoppers like Ms. Díaz factor heavily into P&G's plan to conquer more of the globe. The consumer-products giant has a goal of increasing total sales by 5% to 7% annually over the next three years. As part of that mission, it is looking to tap roughly one billion additional consumers -- most of them very poor women who live in developing countries.

Reaching these customers isn't easy. In emerging markets, P&G estimates that 80% of people buy their wares from mom-and-pop stores no bigger than a closet. Crammed with food and a hodgepodge of household items, these retailers serve as the pantries of the world's poorest consumers for whom both money and space are tight.

Rather than stock up on full-size goods, which cost more per item, they buy small portions of soap, laundry detergent, and single diapers as they need them -- even though the smaller sizes are usually sold at a premium
(this learning is the driving force for Business Design innovation -- you must understand the context of your target customers). In Mexico City, for instance, a full-size bottle of Head & Shoulders that lasts roughly 70 shampoos costs half as much, per ounce, as a single-use sachet.

P&G calls such locally owned bodegas, stalls and kiosks "high-frequency stores," because of the multiple times shoppers visit them during a single day or week. Though most are rudimentary, usually operating out of the owner's home, these shops are a vital route into developing markets, executives believe. But while P&G estimates there to be about 20 million high-frequency stores world-wide, so far just 2.5 million carry their products.

Over the past six years, P&G has been deploying its armies of researchers, product developers and merchandising wizards to better understand both high-frequency-store shoppers, owners and the haphazard distributor networks that stock them.

For P&G the stakes are high. Sales of P&G products in developing markets currently total $20 billion, up from $8 billion five years ago. In recent years, emerging markets have contributed about 40% of the company's "organic" sales growth, which excludes gains from acquisitions. The company still lags other consumer-product rivals. Last year P&G derived 26% of sales in these regions -- a far cry from Unilever and Colgate-Palmolive Co., which manage to snag about 40% of their business in developing markets (the potential is huge)

Many industry observers initially believed that these independently owned shops would die out as major retailers such as Wal-Mart Stores Inc. and United Kingdom-based Tesco PLC expanded their reach into developing markets. Instead, P&G saw the opposite happen. Today, high-frequency stores, considered in aggregate, are P&G's largest customer, with Wal-Mart coming in second (incredible)

As these countries' economies have grown, more tiny stores have popped up to serve their customers' rising fortunes. The buy-in-bulk mentality which had made mass-merchants roll over smaller stores in the U.S. simply didn't apply. "That was a paradigm shift for us," says P&G Chief Operating Officer Robert McDonald. "We'll be in those big-box stores, but we've also got to be in the small ones."

Though Mexico is one of Wal-Mart's most successful markets, high-frequency stores are still regularly visited by 70% of the population, P&G estimates. By the company's count, Mexico has 620,000 high-frequency stores. In most villages and cities there is one approximately every one-and-a-half blocks. Though the average shopper spends just 23 pesos, or $2.14, a day in high-frequency stores, annual sales total about $16 billion.

Selling products through these stores requires a special set of skills (business design innovation often drives the need for a new skill base)

Product visibility, for instance, is one of the biggest challenges to selling in high-frequency stores. Shops tend to be poorly lit and in Latin America average just 250 square feet in size, P&G found. To store owners, displaying P&G staples like household cleaners, bath soaps and shampoos isn't a priority. Those types of products typically represent just 10% of their sales, while food brings in 35%, and soda brings in 25%. To maximize space, shopkeepers often store laundry detergent, toilet-paper rolls and shampoo packets beneath the counter, handing them to shoppers only upon request (the challenge)

So P&G began lobbying for better shelf space, one tiny store at a time, by offering them special perks that rivals do not. P&G-employed merchandisers visit the stores about every two weeks to tidy the shelves of their products, post signs with the items' prices and hand out promotional items, including posters. Also, sales representatives deliver inventory to stores themselves, often sparing owners a trip to the local distributor.

P&G touts other advantages, too: Household cleaners and beauty products bring a higher profit margin than food, candy and soda. And when products are arranged as P&G suggests, sales of those items increases 29%, the company claims to owners.

Five years ago, it launched a "golden store" program to encourage owners to display P&G products more prominently. As part of the initiative, representatives visit the stores to spruce up the shelves and display marketing materials -- small touches store owners say they like. To be considered a golden store in Mexico, retailers must agree to carry 40 or so P&G products -- displayed together rather than next to competing brands. So far, about 220,000 have the designation.

To prompt even more sales of its products, P&G began distributing a magazine called "Tu Negocio," or "Your Business." Reserved for golden store owners, the publication explains the benefits of the company's products. It also offers basic business-management tips, including how to calculate profit margins on the items the stores sell.

Recently, José Ramón Riestra, P&G's director of high-frequency stores in Latin America, dropped by a golden store in León. Immediately, he noticed that several P&G products, including Pampers diapers and Camay soap, were placed along a side wall -- on shelves below waist-level inside a glass case. Since most shoppers tend to linger for less than 60 seconds, they likely wouldn't notice the goods.

Smiling as he introduced himself to Rocío Vazquez, a shy 19-year-old at the counter, Mr. Riestra complimented her on her family's store. Ms. Vazquez estimates about 90 people from the neighborhood shop there every day, often two or three times. After inquiring generally about sales, Mr. Riestra got to the real business at hand. "Why are our products so far away, over there?" he asked, pointing to a side wall. "Why not put them behind you?"

P&G calls space nearest the cashier the "hot zone," and considers it the most valuable real estate in these small stores. Since more than 60% of customers already know what they're going to buy, P&G figures, little time is spent browsing. But P&G researchers found that shoppers tend to gaze at the cashier's area for a precious five seconds as they wait for the owner to hand them a product or get their change -- a prime opportunity to influence future purchases.

Despite Mr. Riestra's request for better placement, Ms. Vazquez didn't budge. "We're known locally as a food store," she says, pointing to the potato chips, candy and a bowl of Hershey's Kisses, priced two for a peso, or about nine cents, that occupied the space that Mr. Riestra wanted.

Next, Mr. Riestra and a P&G sales representative tried to persuade Ms. Vazquez to carry an additional version of Ace detergent, called Ace Natural. Containing aloe, the detergent promises to make washing clothes by hand gentler on skin. Usually high-frequency stores carry just one or two brands of detergent, so persuading shopkeepers to take on an additional version of a brand they already sell is difficult.

"Tell your customers this will be better for their hands," Mr. Riestra says, pointing to the Ace bag's illustration of an aloe plant. He also noted that the price, 4.50 pesos, or 42 cents, is a peso less than the regular version of Ace she already carries.
On this score he had better luck. Ms. Vazquez agreed to carry a few packages of the new detergent.

Initially, P&G had its own exclusive sales force in Mexico to supply store owners with its products. Then, two years ago, the company decided that it lacked the scale and resources to maximize distribution -- especially in far-flung regions. P&G began offering basic sales training to independent agents and encouraged them to build their own teams. Today, the company is experimenting with allowing agents and their workers to earn commissions from markups on products sold to stores.(business design innovation often requires new routes to market)

By relying on local agents, P&G is also able to strengthen its ties to store owners. This is especially important, since owners can be very influential in the brands their customers choose. Though the agents' jobs can be lucrative, the barriers to entry are high. Each must buy his or her own inventory up front, paying in cash. To purchase his first supply of P&G products last year, Luis Mosqueda says he sold nearly all of his family's furniture, his car, his children's toys and his mother's gold jewelry. Now, he says he earns about $24,000 a year -- an income that makes him relatively affluent. Twelve sales representatives work for him, including two of his brothers.

In marketing goods to low-income shoppers, P&G tries to keep in mind their budget constraints and even the coins they carry. Because they are often paid a daily wage, Mexican customers generally carry five- and 10-peso coins. "If you want to sell to low-income consumers, you have to know what's in their pockets," Mr. Riestra says. "It doesn't make sense to have something cost 11 or 12 pesos."

To ensure satisfactory profit margins, P&G uses what it calls "reverse engineering." Rather than create an item, and then assign a price to it -- as in most developed markets -- the company first considers what consumers can afford. From there, it adjusts the features and manufacturing processes to meet various pricing targets. To hold down the cost of its Ace Natural detergent, used to hand-wash clothes, P&G reduced the amount of enzymes in the product. The result: a product that costs a peso less than regular Ace and is gentler on skin.
P&G says that reverse engineering helps to keep the company's after-tax margins "comparable" to those in wealthier, developed countries.

Internally, P&G emphasizes to its employees that products developed for emerging markets must "delight, not dilute." Quality, executives say, is still critical. "You cannot trick a low-income consumer, because they can't afford to buy products that don't work," says Mr. Riestra. If a product doesn't perform, "they won't ever buy you again, and they'll tell everyone they know about it, too."

The company has addressed this point in several ways. Running water, for example, is in short supply for many low-income Mexican consumers. In response, P&G developed a fabric softener, Downy Single Rinse. It can be added to a load of laundry along with detergent to eliminate an entire rinse cycle in the semiautomatic machines typically used here (you must really understand the context!!!!!)

Other observations of the crowded quarters in which many poor Mexican people reside have led to lucrative insights about feminine-hygiene products. With women usually lacking the money and privacy to change their pads frequently, P&G developed Naturella, a low-priced, extra-absorbent cotton pad scented with chamomile, which has soothing and feminine connotations in Latin America.

Driven by strong sales in high-frequency stores, Naturella propelled P&G to take the lead in feminine care in Mexico, and is now sold in other developing markets, including Russia, Poland and the Balkans.

This September, P&G plans to bring to Latin America a merchandising technique common in the tiny shops of Asia: hanging products from the ceiling. Finding that dangling items can catch shoppers' attention more than products sitting on shelves, Mariano Martin, P&G's global customer business development officer, issued a directive to his team: "Own the air."
"The ceiling is still a very virgin location," says Christiane Rizk, a research specialist for high-frequency stores. "We have to get there before someone else does."

Monday, August 06, 2007

Behind Microsoft's Bid
To Gain Cutting Edge

Mundie Follows Gates
As Long-Term Thinker;
A History of Catch-Up

WSJ, July 30, 2007; Page A1

This article highlights the enormous role that culture plays in corporate growth. Prior ways of doing business often do not translate to future success with dramatically changing business environments and technologies. The people at Microsoft are as smart as they come (frankly smarter than most) yet the culture and dominance of the existing, giant businesses seems to get in the way. Interestingly, compare the “flavor” you get from this description of Microsoft with that of Apple’s from the last posting.

As the man designated to replace Bill Gates as Microsoft Corp.'s long-term strategic thinker, Craig Mundie is at the center of a daunting corporate challenge: positioning the company to survive and thrive in the post-Gates era.

That mission keeps Mr. Mundie rolling with his bag of dirt-hiding black clothing and chocolate-mint energy bars through airports around the globe. At Microsoft's far-flung research facilities, he huddles with employees whose work is sometimes ignored by the powerful product executives who set the company's agenda. It's up to Mr. Mundie, the company's chief research-and-strategy officer, to bring home long-term business opportunities.

"The bulk of the population comes to work every day and makes the trains run on time," says Mr. Mundie. "You've got to have a small number of people who think that it's their job to take risks....I view my job, in part, as making sure that the company supports the things that take time but end up being big."

Throughout its history, Microsoft has been slow to grasp some of the computer industry's biggest technology shifts and business changes. When it decides to embrace an innovation, the company has often succeeded in chasing down the leaders, as it did years ago with Lotus Development Corp. on spreadsheets that allow users to organize data, and a decade ago with Netscape Communications Corp. on Web browsers that transformed the experience of using the Internet. For years, this catch-up-and-surpass approach worked well.

Early this decade, however, companies such as Google Inc. and Apple Inc. exposed holes in the approach. Microsoft was slow to see the potential in Web search and online advertising, and despite heavy investments, has so far failed to catch industry leaders Google and Yahoo Inc. It also was late coming to market with its own music player, and despite a push, remains far behind Apple. Today, a host of Web-based software services from Google and others threaten to reduce the importance of Microsoft's personal-computer software.

One year ago, Mr. Gates, the company's chairman, announced that in June 2008 he would give up his post as "chief software architect" to focus full-time on philanthropy. He named Ray Ozzie, a software-industry star who joined Microsoft in 2005, to take over the higher-profile half of that job -- overseeing all software development, including flagship products such as the Windows operating system.

Mr. Mundie got the other half of the job -- charting the company's long-term technology course. Working mostly out of the public eye, the 58-year-old executive is trying to alter the corporate culture so Microsoft no longer misses emerging technologies and businesses. Mr. Mundie is "someone who can work well with the product groups and get their respect," Mr. Gates says. "It takes a unique person to do that." (Mr. Mundie continues to oversee Microsoft's public-policy and intellectual-property strategies, jobs he had prior to the change.)

Microsoft faces an onslaught of nimble start-ups and deep-pocketed competitors coming to market with breakthrough technologies. Microsoft's top executives -- Chief Executive Officer Steve Ballmer and Messrs. Mundie and Ozzie -- will together be judged on how successful they are both at expanding the company's existing businesses and choosing new areas for investment………..
……..Mr. Mundie's current challenge is twofold: To help the company's powerful product groups better adapt to technology shifts; and to make Microsoft a better incubator of new technologies and businesses. His goal, he says, is to move Microsoft to "the leading edge as opposed to the responsive edge in some of these new areas."

Over the years, Microsoft often has been late to recognize important trends, but after focusing on them, has caught up. In the 1980s, for example, Apple popularized the use of the mouse and icons to operate computers; years later, Microsoft adopted and spread that approach. In the mid-1990s, after Netscape demonstrated the importance of the Internet, Microsoft succeeded in quickly building Internet-related technologies into its products.

When the industry's focus began shifting from the PC to the Web, Microsoft's habitual tardiness began to hurt. Years ago, a few Microsoft managers had started a service for brokering online ads, but the effort died on the vine. Google built a huge business linking Internet search results to advertisements. Microsoft only started investing seriously in its own search engine in 2004, and it remains an also-ran behind Google and Yahoo.

Mr. Mundie says advances in technology that represent "fundamental change" or "whole new business opportunities" are "more disruptive, and so people aren't as focused on them" at Microsoft as they are on developing new features for existing products. "When they encounter them, they are naturally a bit more skeptical."

Microsoft's product groups -- business units built around products such as Windows and Office that produce much of the company's cash -- have long had enormous clout in its corporate culture. Star product-group managers, the company's so-called shippers, get the big, profitable products like Windows out the door year after year. For them, meeting deadlines is all-important; longer-term thinking about technology isn't.

Mr. Mundie is trying to help shift some clout to the company's long-term thinkers and to gain more attention for new technologies and businesses. He nurtures small groups in areas he considers promising long-term bets for Microsoft, such as health care, education and super-fast "quantum" computers. During the past year, to attract foreign talent, he has opened more than 50 small research centers in such distant locations as Egypt, Chile, Malaysia and Russia.

"I try to take these issues that look like they're big business opportunities, like health care," he explains, "and create a home for them in a company that historically didn't have any business in the health-care field."

Microsoft brings new technologies to market mainly through its traditional software products. Most of them ship at two- to three-year intervals. Mr. Mundie says that system can hold things up. "There's a bus," he explains. "If you get on the bus, you're out. If you miss the bus, well, the next bus is three years later."………….
………..Mr. Mundie says Microsoft does a good job of pulling technology from research groups into existing products. The challenge, he says, is anticipating what new technologies have the potential to become a big business for the company, or conversely, to threaten its foundation……..