Slowdown in mature economies is making companies globally look at the ‘next 4 billion’ nations for growth. These nations, with an average per capita annual income of between $1,000 and $4,000, and home to four billion people or more than half of the world’s total population of seven billion include China, India, Indonesia and Latin America countries in Africa.
Businesses which have traditionally focused on the ‘middle’ and ‘upper middle plus’ income tiers are now shifting their focus to the ‘Global Emerging Middle’ (GEM) — which lies just below the middle segment constituting a significant, expanding and largely untapped market, says a research by PricewaterhouseCoopers on: Profitable growth strategies for the Global Emerging Middle.
The Global Emerging Middle (GEM) already accounts for 2.3 billion people globally, and is only going to get bigger, thanks to high birth rates and above-average economic growth in many countries in the group, the research says.
GEM will represent a combined annual market in excess of $6 trillion by 2021, and in India alone, the segment is expected to cross the $1 trillion threshold by 2021 as its ranks swell to 570 million, from 470 million in 2010. India is home to one of the biggest Emerging Middle segments in the world.
Companies seeking growth can ill afford to ignore the opportunity offered by this GEM market. But while the segment itself is experiencing sharp growth, companies entering the market often find that profitable growth can prove elusive.
Shashank Tripathi, leader, Strategy and Research, India, and Alastair Rimmer, Global Strategy Leader at PwC, say, "Our research shows pioneers that succeed in creating profitable growth use strategies and innovations very different from those employed in more developed economies. Multinationals stand to learn from these pioneers, but only if they leave their preconceived approaches and business models behind them and show greater flexibility in addressing this new market."
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Focusing on this large, relatively untapped market will enable companies to build early loyalty that will hold them in good stead as these customers acquire greater economic power. Once a company has established itself in the GEM, customers will carry their loyalty with them as they migrate up to the middle class.
This has many advantages: Companies can use the capabilities they have built in the GEM not only to address the middle class in that country but also to compete in other 'next 4 billion' markets that have similar segments.
What’s more, innovations developed in the 'next 4 billion' countries can be exported to mature economies, to spur growth and increase efficiencies there. This is particularly relevant in recent years as mature economies are going through a recessionary phase.
To protect themselves from this new competition on their home turf, and to turn it to their own advantage, multinationals will need to understand the strategies and innovations that are now germinating in the GEM. Companies will have to learn from the leaders in this market and tool up to meet the challenges that are on the way. The strong innovation and R&D capabilities of international companies can be of help for such companies in this journey.
The value propositions designed for countries at the upper end of the global income spectrum seldom work to meet the needs of the global emerging middle class. Companies have to develop a nuanced understanding of the aspirations and unique tradeoffs of this segment and develop solutions to meet these needs.
"Value propositions can’t simply focus on low cost if they are also going to connect with the segment’s aspirational framework. Nor can companies treat the emerging middle class as a homogeneous set of customers. Differences based on location (urban vs rural), age, religion and language require customised products and services based around a standard and scalable platform, and the right value proposition will fuel rapid growth," say Tripathi and Rimmer.
Companies will have to collaborate with key players in the unorganised or informal economy to create an ecosystem that supports their business model. Technology is key, of course, but so are networks of brick-and-mortar service centres and other offline support systems.
Another element for achieving profitable growth is a shift in the mindset. Companies need to adjust, both in their external approach to the market and internal special requirements of the global emerging middle. Those who are looking to enter this market will focus on value propositions, while those already well entrenched will require improving their business models. Both will need a change in mindset. Ultimately, this framework will help companies come up with a holistic strategy for profitable growth.