Strategy

How multinationals can gain traction in emerging markets

Overseas markets are complex and present a range of challenges for outsiders. Here are three rules for success.

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(Photo: Rafiq Maqbool/AP)

The growth of the world’s emerging markets may no longer be a surprise, but the sheer scale of their transformation still has the ability to shock. Recent McKinsey Global Institute research demonstrates the size of the opportunity presented by emerging markets: annual consumption of $30 trillion by 2025. That is not a typo. China and India, the two biggest emerging markets, are experiencing economic acceleration 10 times that of Europe’s industrial revolution—on 100 times the scale. It represents the biggest opportunity in the history of capitalism.

And yet, multinational companies are failing to compete successfully in these energetic emerging markets. In 2010, annual consumption in emerging markets was $12 trillion, or about 32% of the world’s total. (And by 2025, about 50% of the world’s economic growth will be driven by cities such as Ahmedabad, Calcutta, Manila and Wuhan.) But among 100 of the world’s largest companies headquartered in developed economies, just 17% of total revenue comes from emerging markets—about half the “natural share” these global organizations could be expected to hold.

Even though such internationals work from small bases as they build operations in emerging markets, their average annual revenue growth remains barely half that achieved by incumbent emerging-market players. There is a fundamental disconnect between the way companies from developed economies should operate in emerging markets and the way they actually do.

So what can be done? There is no easy answer, of course; these emerging markets are complex and present a range of challenges. But there are three broad fronts across which companies must develop their capabilities to succeed in emerging markets.

First, they must carefully choose their opportunities and, we think, focus on cities. Existing size and strength offers no guarantees, and companies should take advantage of the wealth of data now at their disposal to target specific consumers in specific geographies and cities in very specific ways. For example, two of China’s biggest cities—Guangzhou and Shenzhen—are in the same province and just two hours apart. Yet Guangzhou residents are mostly born locally, speak Cantonese, and spend their leisure time at home with family and friends. More than 80% of Shenzhen residents are migrants, most speak Mandarin and spend their leisure time away from home. A provincewide approach—let alone a countrywide one, will not work.

Second, once companies commit to expand, they must do so aggressively. In general, companies from emerging markets invest more, and more often, than their counterparts in the developed world: between 1999 and 2008, emerging-market companies paid out half as much in dividends, but invested much more in fixed assets. Companies in emerging economies choose to generate wealth for shareholders not by paying dividends, but by aggressively reinvesting capital to spur growth. Newcomers will have to adjust their definitions of success accordingly.

Finally, companies must be persistent. Capturing the emerging-market opportunity is a long-term effort: management processes and structures may need to be changed, and new models adopted. Be prepared to compete on your own turf as well, and soon: companies from emerging markets also are increasingly succeeding within developed economies. Actually, we have found that companies from emerging markets achieve superior revenue growth pretty much everywhere, leaving established multinationals struggling to both capture emerging-market growth and defend against new competitors in traditional markets. They do this by getting exactly these basics right: they carefully identify opportunities, invest appropriately and stick with it.

For established multinationals, this should hardly be radical. Today, however, too few of them appear to be heeding these lessons. But I would argue that even a tiny slice of the biggest opportunity in the history of capitalism is something worth grasping.

Dominic Barton is the global managing director of McKinsey & Co.