Eyeing Emerging Markets? Think Micro, Not Macro
For many companies, emerging markets are full of opportunity. You have growing groups of people with increasing disposable income they're looking to spend. At the same time, because the markets haven't been robust in the past, many businesses have ignored them. The result? Pent-up demand and insufficient supply.
Sounds great, right? But according to a study from McKinsey, many companies are approaching emerging markets from too high a level, missing the urbanization dynamic:
This urbanization wave is shifting the world's economic balance toward the east and south at unprecedented speed and scale. It will create an over-four-billion-strong global "consumer class" by 2025, up from around one billion in 1990. And nearly two billion will be in emerging-market cities. These cities will inject nearly $25 trillion into the global economy through a combination of consumption and investment in physical capital.
Think More Micro
According to McKinsey's analysis, 440 emerging market cities will deliver almost half of global GDP growth. That is a stunning number. It effectively says that an enormous portion of the economic expansion that the world is likely to see will be concentrated in a relatively small number of urban areas. You could call these the new economic city-states, because they are the most likely places to offer opportunity. If you want to give your business a shot in the arm, these are the places to do it.
But according to McKinsey, most companies are blowing their chances. Fewer than 20 percent of surveyed executives looked beyond the country level when deciding where and how to target new markets. Most executives expected their strategic approach to remain fixed for the next five years and 60 percent thought that cities were an "irrelevant unit of strategic planning."
It's hardly irrelevant if you have heavy concentration of where business takes place. As Willie Sutton famously replied when asked by a reporter why he robbed banks, "that's where the money is." Why would you go where the market isn't?
Shake Up Your Safe Bets
Executives actually had some convoluted answers to this. Their companies get locked into a way of doing things and changing the way of thinking can be difficult. They also focus on existing opportunities, not future ones, in an economic variation of Clayton Christensen's innovator's dilemma. To embrace the future means redirecting resources that help drive existing revenue--and that have been safe bets. But what they miss are some significant opportunities:
Take Foshan, Porto Alegre, and Surat--cities that are unlikely to be high on the priority lists of global executives, though each has more than four million inhabitants, fast growth, and a vibrant base of consumers. Indeed, each of these cities will contribute more to global growth than Madrid, Milan, or Zurich.
Those cities are respectably in China, Brazil, and India, by the way.
All this should be great news to entrepreneurs. On one hand, there is a number of big underserved markets in the world. On the other, big competitors that could easily brush you to the side are largely ignoring them. That spells opportunity.
ERIK SHERMAN | Columnist
Erik Sherman's work has appeared in such publications as The Wall Street Journal, The New York Times Magazine, and Fortune. He also blogs for CBS MoneyWatch.