Five Myths About Emerging Markets

Dont let misperceptions derail your success.

by Radu Auf der Heyde and Kristy Sundjaja

merging markets offer the possibility of enormous priority on technology products and services over other
growth. Unfortunately, many western companies discretionary items. Consumer spending on telecom, for
enter them at a strategic disadvantage. Operating instance, is showing a compound annual growth rate of
under misguided notions about emerging mar- 10%15% in most emerging markets, compared with
kets, they create offerings that often fail to meet the needs of less than 5% in developed markets. Mobile phones have
consumers and business customers. As a result, these compa- rapidly become the most common consumer electronics
nies miss out on significant growth opportunities.
device in the world, with over three billion in use at the
How significant? Consider the technology, end of 2007.
communications, and media sectors. Research conducted
Growth in consumers use of the Internet (including
by Oliver Wyman revealed that companies in these sectors broadband access in households) has also proven explothat were headquartered in emerging-market countries sive in many emerging markets. In 2001, the United States
grew their market capitalization by 38% annually over had 500 Internet users for every 1,000 people, a penetrathe past five years, compared with 15% for companies tion rate of 50%. That same year, Chinas penetration rate
headquartered in mature markets. Moreover, seven was just 2.6%. But by 2007, Chinas rate had jumped to
of the top 10 best-performing companies were either 12.3%. In only six years, China added more than 130 milheadquartered in an emerging market (such as the Hong lion Internet usersalmost as many as the total number
Kongbased China Mobile and the New Delhibased of Internet users in the U.S.
Bharti Airtel) or had aggressively invested in emerging
At the enterprise and small-business level, technology
markets (such as Telefnica, headquartered in Spain but is a vital tool in emerging markets. In Africa, for instance,
heavily invested in Latin America, and Telenor, based in small farmers can easily access weather information and
Norway but with operations in eastern Europe and south market prices for their crops via their mobile phones.
Asia).
In China, 57% of small-business managers we surveyed
This article dissects the five most prevalent myths strongly agreed with the statement Technology is critical
about emerging markets. Its based on our client work to create a competitive advantage for my business. Industry
as well as our surveys of more than 20,000 consumers analysts forecast large increases in enterprise telecom
and businesses in developing markets. Although this spending in developing markets, particularly in wireless,
article focuses on the technology,
communications, and media sectors,
its lessons are relevant to any company Money in the Middle
considering a move into an emerging
Total spend = $2.1 trillion
market.
$ billions
Myth 1: Emerging markets are
technology backwaters

Based on this assumption, companies

have targeted emerging markets
primarily with low-end products
that contain just basic features. Yet
our research shows rapid adoption of
technology in emerging markets; in
some cases, adoption has been so swift
that its leapfrogged that in western
markets. Consumers and businesses
in developing markets place a high

100%
High
disposable
income
Medium
disposable
income

$ 443

$ 373

$ 471

$ 791

80

60

Medium
disposable
income =
$1.3 trillion or
$924 per capita

40
Low
disposable
income

20

20%

Brazil
Source: Euromonitor, Oliver Wyman analysis.

Copyright 2008 by Harvard Business School Publishing Corporation. All rights reserved.

Russia

40%

60%

India

80%

China

100%

Myths About Emerging Markets

continued

over the next five years, while mature European markets,

though representing larger expenditures, will experience
Money in the Middle
slower
growth.
Leapfrogging is common. Many
consumers are going
Total spend = $2.1 trillion
directly to laptop $purchases
rather than starting with
billions
$ 443
$ 373
471 emerging$ 791
the traditional 100%
desktop
models.
And $many
marketHighoperators have begun offering services such as
disposable and balance transfers via mobile phones.
cash payments
80
income
Kenyas Safaricom (Vodafone) M-PESA has a service that
allowsMedium
mobile customers
to perform basic operations like
60
disposable
cash deposit,
withdrawal,
and transfer.
income
40

MythLow
2: Emerging-market consumers cant
disposable
20
afford
technology
purchases
income

This is simply not true. More than 80% of consumers in

key emerging markets
have20%
sufficient
disposable
0
80%
40%
60% income
to allow them to purchase
technology.
(See
Brazil
Russia
India the exhibit
China
Money
in the Middle.) These markets have affluent
Source: Euromonitor, Oliver Wyman analysis.
consumer segments, and even middle-income consumers
are able to spend a significant amount on technology.
And not just any technology. Our research shows
that consumers and small businesses in developing
countries want and will pay for higher-quality products
and innovative features. One survey in the BRIC markets
(Brazil, Russia, India, and China) showed that small
businesses were willing to pay a 20% to 30% price premium
How Brand Affects PC Preference
100%

=BRIC small business

80
70
% of
respondents

60
50
40
30
20
10
0

Unbranded PC

Local/national
brand PC

Myth 3: Consumers in emerging markets

wont pay a brand premium

Most technology
executives have assumed that global
Medium
disposablewould have difficulty commanding a healthy
corporations
income =
trillion or in emerging markets. They think that
brand$1.3premium
$924 per capita
low-cost, no-name local competitors would win most of
the market share.
They need to think again. In Brazil, for example, 59% of
our
survey respondents said they were extremely likely
100%
to purchase an international brand PC as their next home
computer. In another survey, about printers, we found
that brand was a more important factor in customer
decision-making in all four BRIC markets than it is in
western markets.
Like consumers, small-business owners in emerging
markets are intensely interested in branded products. In
BRIC, for instance, small-business survey respondents said
they were extremely likely to purchase an international
brand PC as their next computer. (See the exhibit How
Brand Affects PC Preference.) One reason is risk aversion.
Strong global brands are considered safer than local brands
with limited track records.
Myth 4: Technology offerings from mature
markets will succeed in emerging markets

=BRIC consumer

90

for smaller or faster printers. Another consumer study

found only small differences in technology purchasing
patterns between middle- and high-income customer
segments. Considering that the middle-income segment
can represent up to 70% of the total population in some
emerging markets, these consumers are attractive.

International
brand PC

Source: Oliver Wyman analysis.

Consumers and small-business owners were asked how likely

they were to purchase an unbranded PC, a local or national
brand of PC, or an internationally branded PC.

Whats good enough in mature markets, executives

assume, should work in emerging markets. But the
evidence shows that companies should create offerings
with product features and pricing tailored to the specific
needs of consumers in developing markets. And in some
cases they should consider completely new business
models.
Products that have been customized for local priorities
have attracted intense interest. Telecom giant Nokia
saw a huge potential market in rural India, where 70%
of that nations population resides. Nokia designed its
mobile phones with a flashlight feature (handy in a
region with unreliable electricity), a dustproof keypad,
multiple address books, and individual call-time tracking
(for shared use of phones). Though the phones are large
and thus less appealing in mature markets, these unique
features make them convenient and attractive to rural

4 harvard management update | august 2008

Myths About Emerging Markets

continued

Indians. Nokia then adapted its marketing strategies to

the distinctive characteristics of rural India. For example,
it sent mobile vans to remote villages to tout the phones
benefits and to gather additional insights on rural
customers needs.
Myth 5: emerging-market Consumers focus on
products, not services

Many firms have neglected to develop their service

offerings and have missed opportunities to offer bundled
solutions to emerging-market customers. We performed
several studies to investigate the role of support services,
such as telephone troubleshooting and in-home setup, in
driving technology product sales in developing nations.
The evidence showed that these services have a significant
impact on sales. For example, for customers purchasing a
PC, the availability of support could enhance sales by as
much as 10%.
The potential for support services to drive product sales
is even greater among business customers than among
individual consumers. In a study of small and mediumsize businesses in BRIC, two-thirds of respondents
said they were likely or very likely to buy on-site
maintenance services after purchasing a technology
device, as well as automated replenishment services for
the devices supplies. u
Radu Auf der Heyde is a San Franciscobased associate
partner and Kristy Sundjaja is a New Yorkbased associate
partner of Oliver Wyman. They can be reached at
MUOpinion@harvardbusiness.org.
Reprint # U0808C: To order a reprint of this article, call 800-668-6705
or 617-783-7474.

harvard management update | august 2008

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