By Sergio Koc-Menard From fDiIntelligence

The parallels between being an early investor in emerging markets and wearable tech may not be readily evident, but, as Sergio Koc-Menard explains, in both fields it pays to look beyond the here and now, and focus on shaping markets rather than simply joining them.

Market expectations can change quickly. Not so long ago, emerging market growth was almost taken as a given. Today, conditions are far less benign. The pace of China’s expansion has slowed, prompting Beijing to deploy fiscal and monetary measures to stimulate the economy. Meanwhile, the outlook is mixed in many parts of the Middle East, Africa and Latin America, particularly in countries that rely heavily on commodity exports such as oil.

Expectations shape strategy. Prompted by recent economic data and gloomy forecasts, international companies are reviewing their exposure to emerging markets. While many have the agility required to thrive in a variety of environments, some international companies question whether the potential returns in emerging markets are worth the risks. Because macroeconomics influence corporate performance, it is sensible to be cautious. Stagnation or negative growth put pressure on sales and margins, high inflation increases costs and fiscal uncertainty discourages investment.

A long-term view

However, it would be a mistake to assume that economic updates and near-term outlooks provide a complete view of the emerging market opportunity. Both sets of data offer valuable insights for the evaluation of immediate context and the forecasting of short-term returns. But in fast-paced emerging markets they do not provide a comprehensive measure of potential or long-term value. When economies are emerging, what can be seen is not all there is to consider.

A useful comparison can be made with another type of emerging market, that of new technologies. Professor Clayton Christensen of Harvard University observes that new technologies create markets which, for a short time at least, tend to be small, unprofitable and lacking in direction. Consider the wearables industry, which includes smartwatches, smartglasses and digital clothing. There has been a lot of media noise about the potential of wearables, yet even a cursory review of the data reveals that sales remain modest and user adoption is by no means widespread.

In this context it might seem prudent for firms seeking to grow in the consumer devices industry to postpone major investments until the clouds have dispersed. Mr Christensen’s research, however, suggests that a wait-and-see strategy is rarely rewarded. By the time a new market has become large and profitable, the opportunity to capture a substantial share of it has passed. First movers have secured a leadership position and can use it to fend off late entrants. In short, certainty comes at a price.

When companies use recent economic information and 12-month forecasts to assess opportunities, they reproduce a common pattern of thinking. Economist Daniel Kahneman says that peoples’ minds excel at using readily available information to build a coherent picture of a situation, but without necessarily accounting for distant or unknown factors. There is value in this tendency, for it allows people to create narratives relatively quickly and on the basis of incomplete information. In many cases these narratives are close enough to reality to enable sensible choices, but when they are not close to reality they can lead to costly missteps and lost opportunities. The more complex the issue at hand, the more likely it is that partial assessments will miss critical variables.

Research by Mr Kahneman and others suggest that it is difficult for individuals to look beyond the facts of the moment. But some companies are managing to change their approach and are building processes that encourage a more systematic approach to data. Apple’s focus on smartwatches, for example, is driven not so much by the current state of the product category as by its potential to push the frontiers of mobile technology and to disrupt the established watch industry. More than that, Apple is betting on its own ability to make the smartwatch market take off, as it has done previously with the smartphone and tablet markets.

Emerging lessons

The same mindset can be applied to an analysis of emerging economies. One way to start is to reframe the information at hand to search for hidden opportunities. While the recent slowdown can certainly be seen as a threat to top-line growth and margins, this is not the only interpretation. For example, Javier Garcia-Sanchez of the IAE Business School and his co-authors show in a recent article that weak macroeconomic conditions create opportunities to outmanoeuvre incumbents and to capture market share.

The authors note that economic shocks and downturns affect the relative value of business competencies, essentially changing the basis on which firms compete in their markets. In relatively stable times, companies can take a lead by expanding rapidly and by developing an advanced product portfolio, even at the cost of high debt levels. In a downturn, by contrast, financial flexibility becomes critically important. Firms with a strong balance sheet and the ability to raise capital can grow organically by capturing the space left by struggling competitors, or expand through strategic acquisitions as asset prices decline.

When considering whether to expand in a difficult environment, companies should consider a range of different time horizons. The rationale behind investment in wearable technologies, for example, is that advances in mobile internet platforms will fundamentally reshape how a user makes, buys and uses products over the long run, irrespective of near-term volatility and commercial uncertainty.

A similar logic fits geographic emerging markets. It is true that the near-term outlook for many emerging economies is uncertain, but it can also be argued that discouraging headlines hide promising underlying trends. One such trend is that emerging economies will continue to grow faster than developed markets over the next decade, increasing their share of global GDP. Another is that emerging markets will drive global population growth, and that as income levels improve millions more people will join the middle classes and help to fuel consumer spending. Firms that build themselves a strong market position in emerging economies while it is raining will therefore benefit when the sun comes out and growth picks up again.

Forward-looking firms do not stop there; they imagine a different future for their target markets. This involves reframing the information at hand and uncovering fundamental trends, but with the intention of reshaping the competitive environment. Navi Radjou and Jaideep Prabhu of the University of Cambridge note that companies often need to rethink their production processes, business models and value propositions to thrive in volatile emerging markets. It is not enough to adapt global offerings to local realities. Companies need to mobilise internal and external resources to shape markets to their advantage.

Shaping a market often requires a major strategic effort. Successful firms have re-engineered their cost structures to serve a broader client base, built collaborative relationships to influence local perceptions and attitudes, and combined advanced technology with local insights to develop market-specific products and services. Many create value by enhancing features that are critical for consumers in that market while removing anything that is seen as accessory. A key advantage of this approach is that international companies can then use the new value proposition to service less affluent customers in developed markets.

Shaping industries

The underlying truth is that creative companies make markets emerge. Their analyses not only map the territory, they reveal how to create new territory by marrying the intelligence they gain from today’s data with foresight into underlying trends that will shape the future. As Michael Porter of Harvard University observes, while multiple companies may benefit from a transformation, the firms that lead the way will benefit most if they can shape the industry to their advantage. This is as true in emerging economies as it is in the tech industry. In fact, as competition intensifies and as established markets become overcrowded, a firm’s ability to thrive over the long term is becoming increasingly dependent on its ability to penetrate economies that are still emerging with value propositions that redefine competition.

Expectations and strategies should be based on facts. Companies with overseas ambitions cannot ignore volatility in their target markets just as technology companies cannot afford to let excitement about an innovation overrule commercial sense. But firms should not assume that empirical data or near-term outlooks provide a fair view of a market’s potential. They can reframe available information to spot opportunities that are currently obscured, they can change their analysis horizons to build on long-term trends and they can develop customer propositions that reorder their markets. Hidden links sometimes yield the best results.

Sergio Koc-Menard is a relationship director for HSBC’s international corporate banking team in London.

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