A World of Ideas

Understand the implications of change for your business

One of the greatest changes in human history has taken place without many of us even noticing: unparalleled demographic change during the Twentieth Century. Global population nearly quadrupled (from 1.6 billion in 1900 to 6.1 billion in 2000), while the shortest time for the global population to double occurred between the administrations of US Presidents Kennedy and Clinton. In 2007, 6½ days of India’s population growth equalled one year of population growth in the EU. This was combined with unprecedented declines in mortality and fertility, significant international migration and increased urbanisation – resulting in the emergence of mega-cities. The fastest growing populations are in India, China, Pakistan, Nigeria, Indonesia and Bangladesh. In 2006, for the first time, global urban population exceeded global rural population (source: UN Centre for Migration Studies). This movement to cities, like much demographic change, is altering behaviour and expectations. Finally, populations will be older, with long-term implications for welfare policies, pensions, taxation, employment and spending.

Clearly, demographic developments are changing the world and bringing opportunities. For example, HSBC bank was the first to recognise that immigrants in the UK had specific banking needs (e.g. to repatriate funds from overseas) and circumstances (no banking history in the UK) and offered products tailored to suit this market. The questions to ask are: What are the trends? Where are the opportunities and threats? Who are your customers now, and who will they be in the future?

Use technology to achieve breakthrough growth

In Western economies, established businesses often struggle to achieve industry-leading growth rates because their sector is mature, or highly competitive, or because they become stuck in the rut of incrementalism. Firms become convinced that they need to compete in the same way as their rivals: minimizing risk, maximizing resources and making acceptable returns. In emerging economies the approach is different. Here, successful local firms fundamentally reconceive what drives their profits: they build a better business model and achieve breakthrough growth.

For example, when Estonia emerged from Soviet rule and established their retail banking industry in the 1990s they went from a Soviet system to a new model emphasising telephone and Internet banking with credit and debit cards. This largely bypassed the branch networks and cheque books that had characterised the development of banking in the West. Also, Cemex, a small commodity business in Monterey, Mexico became one of the largest cement companies in the world through a radical reassessment of the factors driving profitability – outperforming its international rivals, Holcim and LaFarge, in share price, operating margins and return on assets. Cemex moved from selling concrete ‘by the yard’ to selling timely delivery of a commodity. Delivery was what mattered to customers: getting the right amount, in the right place at the right time, without workers waiting or the concrete spoiling. Using methods employed by Federal Express, Cemex developed digital technology to manage its trucks. Now, Cemex uses GPS technology to guarantee delivery of ready-mix cement within a 20-minute window.

Such success requires a proactive approach, developing new ways of serving customers and ensuring efficient operations. The following techniques can help to achieve breakthrough growth:

• Transforming the customer’s experience and finding new ways to meet their needs.
• Changing the product and service offered to customers, to reflect what they value. One approach is to differentiate your offer by sorting product attributes into three categories: basic, differentiated and exceptional. Then consider how to develop new advantages and strengthen existing ones to make your product exceptional.
• Change performance metrics, to better monitor and improve your customer offer.

Develop audacity

“As South Africans, we weren’t really frightened of emerging markets compared to the things that we were going through at home,” commented Graham McKay, CEO of SABMiller (formerly South African Breweries). Difficult trading conditions instilled determination and resilience in managers at SABMiller, one of the world’s largest brewers. Having built SAB in their domestic market they wanted to compete internationally following the end of apartheid. They were ingenious, flexible, determined and prepared not to follow convention. For example, SAB entered markets that (from the mid-1990s) were unfashionable – in Latin America, China and Central Europe. Although these developing economies represent attractive growth markets now, SAB’s culture of taking on challenges meant they were there first and achieved considerable success.

SABMiller’s boldness helped it become a global giant in little over ten years and this audacity can be developed with several techniques. First, find the dangerous edge, the point where the greatest risks lie; this will increase your confidence and ability to avoid disaster. Next, build a supportive team and be specific about what will happen in any situation. Start by accepting and explaining the risk but finish by emphasizing strengths and visualizing success. It is important to build confidence in stages and to develop ancillary skills – this also builds confidence, especially in complex situations. Above all, recognise that moving into a ‘danger zone’ has positive psychological benefits, including heightened awareness and concentration.

Target the fortune at the bottom of the pyramid (BOP)

Professor CK Prahalad of the University of Michigan argues that there is a ‘poverty penalty’ where the poorest people pay more for everything because they don’t have a choice: they are stuck with local monopolies and bad products and services. Therefore, if a company goes to the bottom of the wealth pyramid and builds affordable products, creates awareness and provides access, then the market is phenomenal.

Research recently highlighted by the World Resources Institute shows that the world’s 4 billion poorest people represent a US$5 trillion market opportunity. There are several other issues at the bottom of the pyramid.

• Pricing is vital. At the BOP you need to start with an affordable price, understanding that price minus profit equals the acceptable level of cost. This different way of thinking leads to a new range of exciting options.
• Innovation is essential – this can be accelerated and improved by focusing on BOP markets because minor, incremental changes won’t be enough: the market requires a fundamental rethink.
• Businesses need to substitute investment for collaboration. Management time is needed to increase collaboration – and it’s cheaper than simply investing cash.

Companies that ignore emerging markets will get left behind – and will have ten years, at best, before businesses from emerging markets start competing with them.