New Business Models, Potential Rewards and Risks Involved in Conducting Business in Emerging Markets - Assignment Example

Questions and Answers Assignment: Marketing

Question One: Potential rewards and the main risks involved in conducting business in Emerging Markets

Emerging markets play a critical role for businesses people and investors. At one particular time, there must be emerging markets where investors are looking up to start venturing (Ciravegna et al., .2014). However, investors and businesses people face risks as well enjoying benefits while investing in emerging markets. The following section seeks to the risks and rewards that are found in emerging markets.

Firstly, one of the potential rewards derived from conducting a business in emerging markets is that there is increased demand for new kinds of products and services. Emerging markets often have a growing upper-class population (Ciravegna et al., .2014). The consumers in emerging markets are sometimes interested in buying luxury goods that were previously unavailable in the region. In this way, a new business could benefit if one takes advantage of the opportunity in order to reach customers who may have never had the opportunity to buy such products before. At the same time, the scarcity of one’s product or service could make it easier for a brand to be perceived as a status symbol by the potential and existing customers (Ciravegna et al., .2014). Therefore, as a second reward or advantage, a business or company can establish a brand as well as eliminating competition. As the name suggests, emerging market may be virgin territory for the goods or services that a given firm is providing. In this way, the level of competition could be very low making the company gain maximum profit on the product being provided to customers. Thirdly, if one starts a business in an emerging market, the venture becomes part of a growing infrastructure. For example in most of the emerging markets, there are a lot of infrastructural project such as building of roads, expansion of communication systems which provides a great foundation for new business in terms of creating long lasting relationships with the local population (Ciravegna et al., .2014). Fourthly, a company is able to easily diversify its products to the customers. Emerging markets provide avenue through which business can expand and be able to diversify its products. Important to note is that if a business is only found in one locality, chances of diversifying become slimmer.

On the other hand, it must be noted that there are many risks that news businesses may face such as fluctuation of exchange rates (Ciravegna et al., .2014). Notably in emerging markets, the economies are not stable enough which makes their currencies much more vulnerable to changes in the dominant currencies such as the U.S. Dollar. In this way, the local currency may become weak, thus affecting businesses in one way or another. Secondly, emerging markets show a non-normal distribution due to the unstable economies and their dynamism. Therefore, businesspersons are not able to evaluate the markets using mean-variance analysis, which helps in drawing correlations between returns and events. Thirdly, insider trading restrictions are not usually as from as it should be. Emerging markets are constantly faced with unscrupulous business malpractices such as corruption, which harm the business environment (Ciravegna et al., .2014). Fourthly, emerging markets are generally less liquid compared to those in the developed world, which leads to in higher broker fees as well as increased level of price uncertainty for Investors.

As noted above, most of emerging markets are not stable in different ways especially political aspects. Political risks refer to the uncertainties regarding adverse political decisions. In most of the develop countries there is low government intervention unlike in emerging markets. some of the political issues include change of market policy, possibility of war, loss of subsidy, tax increase, among others.

Question Two: Summarizing and Discussing “New Business Models in Emerging Markets”

In the article, the authors note that Western multinational companies have experienced difficulties while trying to establish themselves in emerging markets (Eyring et. al., 2011). However, according to the authors, some multinational companies are failing not because they are not providing viable products and services but due the application of wrong business models (Eyring et. al., 2011). In advancing this theme, the authors argue that many multinationals companies simply import domestic models into the emerging markets but with little changes such as lowering of prices designing and manufacturing their products locally and hiring local country managers. Despite such modifications, their original business models and fundamental profit formulas remain the same.

In order provide a solution in coming up with business model in an emerging market, the authors have developed a process that should help potential investors (Eyring et. al., 2011). According to the authors, the process should start by Identifying an important unmet job that the target customer need followed by blueprinting a model that should profitably accomplish that job for a price that customers would be are willing to pay and carefully implementing and evolving the model through testing essential assumptions as well as adjusting as one learns.

Question Three: The Bottom (Base) Of the Pyramid

In economics, bottom of the pyramid refers to the largest but also the poorest social-economic group in the society (Lymbersky, 2008). Notably, in global terms, the bottom of the pyramid is composed of the 3 billion people who live on less than say $2.50 per day. Understandably, the phrase “bottom of the pyramid” is used especially by those who are developing new business strategies and models in order to address issues that affect this portion of the society such as through the use of new technology (Lymbersky, 2008). Based on this observation, “bottom of the pyramid” can be grouped into two main categories, which include segmenting by the living standards and by the Value-Creation Role.

One of the simplest methods of analyzing the “bottom of the pyramid” is to understand and recognize that the $1 per day income level is used to extremely separate the poorest from every other person in the society (Lymbersky, 2008). Under this segmentation, it should be understood that those who are above that demarcation could be roughly divided into people earning $1 to $3 per day as well as those earning between $3 to $5 per day. Although this is not the only of categorizing this tier of the pyramid, the method has proved to be a useful one.

The first subcategory is the “low income” group, which is estimated to be consisting of more than 1.4 billion people who live on $3 to $5 a day. Typically, the persons who fall under this category have a couple of years of secondary education as well as skills needed in entering the job market (Lymbersky, 2008). Most of the members of “low income” category earn semi regular incomes as drivers, construction workers, petty traders, or low-level staff in both public as well as commercial establishments.

The second subgroup downwards is the “subsistence” category which forms roughly 1.6 billion people and who lives on $1 to $3 a day (Lymbersky, 2008). The groups consist of poorly educated as well as low skilled persons. Although these group of people may have some income as temporary workers and day laborers their earnings are not always steady. Therefore, many people under “subsistence” category require improved health care, sanitation, and education. Further, they do not have access to formal credit and bank accounts thus turning to moneylenders for loans, which are at exorbitant rates (Lymbersky, 2008). At the same time, members of this segment are vulnerable to mistreatment and exploitation from intermediaries.

The last category is the “extreme poverty” level, which is formed by close to 1 billion who lack basic necessities such as clean water, sufficient food, and adequate shelter (Lymbersky, 2008). Further, some of the characteristics of this group include women covering long distances to fetch water, living in barter economies, poor health and nutrition, among others.

Notably, the second category is segmenting the “bottom of the pyramid” by Value-Creation Role, which refers to the role that people at the base of the pyramid play in the economy as consumers, co-producers, or clients (Lymbersky, 2008). As consumers in the “bottom of the pyramid”, people play a critical role in using the products and services manufactured or produced by companies. The low-income category has a bigger potential of consuming services compared to the “subsistence” and “extreme” categories since their purchasing ability is stronger, which also applies in coproduction and as clients (Lymbersky, 2008). However, it must be understood that it depends on the kind of services or products being produced in a given segment since each category has different needs and demands.

Question Four: ‘Reality Check at the Bottom of the Pyramid’ by Erik Simanis.

Based on the article, ‘Reality Check at the Bottom of the Pyramid’, the author, Erik Simanis disagrees, for a number of reasons, with the notion of selling enormous quantities of products at low prices in the hope of generating decent profits in BOP (Simanis, 2012) . According to the author, the “low price, low margin, high volume” model provides a fatal flaw for businesses if not well analyzed. Firstly, the author argues that the model requires an impractical penetration rate of 30% or more in the target market. Simanis observes that it is not easy to sell products to customers in a rural village or few neighborhoods for larger slums (Simanis, 2012). According to Simanis, each business is forced to produce volumes of products for small segment of the population, which makes the process daunting and inefficient. At the same time, opportunities to leverage on the existing infrastructure are limited and the products being sold might be new to the people (Simanis, 2012). Simanis notes that scaling a business in a village or slum is a toll order especially due to poor infrastructure. The capital expenditure needed to scale up the business per unit output is always high in a BOP environment.

Further, the “high-touch sales” in BOP is as well costly (Simanis, 2012). According to Simanis, individuals in these kind of environments lack the “cultural competence” when it comes to products consumption (Simanis, 2012). In other words, they are not used to using and experimenting with product being sold. In this way, they need products that will directly serve their needs without wasting time in experimenting them. The new business in such circumstances will be required to hire skilled sales peopled that will be able to market the products to the locals, which is a challenging experience for companies.

In solving the above problem, Simanis has given recommendations under “margin-boosting solutions” (Simanis, 2012). The first proposal is to localize and bundle base products. By localizing, Simanis notes that companies can bring services closer to customers by conducting final processing within the locality such as mixing detergents (Simanis, 2012). On the other hand, bundling refers to packing products and selling them as one thus minimizing the time and distance of accessing of such products.

Secondly, business people should offer enabling services such as creating good and tangible relationship with customer support teams or explaining how products work to enhance customers’ experiences (Simanis, 2012). Lastly, it is prudent to cultivate customer peer groups in a given locality. The objective is to create a culture that is bonded by product’s experience among customers (Simanis, 2012). According to Simanis, customer peer groups are also instrumental in boosting the sales thus the margins.

Question Five: Global Marketing vs. Multi-Domestic Marketing

Evidently, modern communication and technological advances have made it easier than ever for businesses to market their products and services internationally (Lymbersky, 2008). Importantly, before entering any new market, companies need to analyze cross-cultural environments in order to compare the existing differences and similarities among countries. Consequently, the outcome of the cross-cultural analysis as well as the type of product being offered in the market a segment will determine the most suitable international strategy, which could either be global or multi-domestic marketing strategies.

Global marketing strategy assumes that all consumers in all geographic regions or countries are the same (Lymbersky, 2008). Notably, this strategy is most suitable for standardized products such as Coca-Cola and copy machines where there is little or no product differentiation. Accordingly, global marketing has distinct benefits including allowing centralized management and coordination of critical business operations such as finance, human resources, and product development. On the other hand, multi-domestic marketing strategy assumes that consumers in different geographic regions or countries differ drastically. In this case, goods and services are produced a specific market, depending on the needs and wants of consumers (Lymbersky, 2008). Further, in a multi-domestic marketing strategy, produced are highly differentiated and decision-making processes are decentralized since management should be able to respond to each target market. Unlike in global marketing, each country will need a county manager to manage business operations.

Notably, one of the advantages of Global marketing strategy is that it is an efficient option if one’s business provides a combination of products or services that are universally used or if global clients service the same benefits and value of a specific product tor a service (Lymbersky, 2008). At the same time, a firm can design a business format or design and develop one product or a service and goes ahead to market it with constant messaging. In this way, the company is able to save money since it is not designing any new message or marketing strategies thus enabling one to build company’s global brand. For example, Nike was able to develop its brand globally by marketing an image of versatility, quality, as well as status everywhere. Connectively, it should be noted that customers around the globe are keen in recognizing and understanding the image and brand of a given firm based on its marketing strategy and market influences.

Despite the aforementioned advantages of Global marketing strategy, there are different challenges such as the application of the same marketing strategies for products and service, which may not work in every segment (Lymbersky, 2008). Notably, different products and service contain varying usages, which need to be attached to specific propositions in marketing, making it a daunting task for a company, which uses Global marketing strategy. Unlike multi domestic approach, it is challenging for companies that use Global marketing strategy to have direct contact with the customers’ needs and wants since the decisions made at the headquarters affect all regions in the world regardless of their specific concerns.

In multi-domestic marketing strategy, one of the advantages is having a customized and targeted messaging strategy that is able to directly connect with the needs of each market segment (Lymbersky, 2008). At the same time, this approach helps the company to address the needs and wants of customers in line with the issues in a given country or region since the country manager is able to understand any changes in the social, political or economic aspects. The major disadvantage of multi-domestic strategy is that it is usually expensive to implement. For example, if a company intends to establish its presence in different countries in the world at once or within a given period, it will be required to recruit managers and their staff to run its operations for every country or region, which would require a large capital.