Emerging markets—characterized by a rapidly expanding middle class and growing consumer spending, which McKinsey & Company estimates will reach $30 trillion by 2025—present an unprecedented growth opportunity for companies. To successfully expand to these markets, US and European companies must operate differently, and work within landscapes they aren’t accustomed to or designed for. Whether it is contending with a relatively small middle-class population, insufficient infrastructure, or the need to design and deliver products and services in an entirely different way, succeeding in emerging markets requires an expanded and different skillset. It also requires a broader appreciation for and commitment to addressing “contextual gaps” as part of core business strategy.
Addressing these contextual gaps involves taking on two important challenges: maintaining a sustainable supply chain and making business activities more inclusive. The first challenge, sustainability, increases as market opportunities expand. Consider the case of Yum! Brands in China: The popularity of its KFC franchise and the resulting unprecedented rise in demand for poultry stressed Yum!’s supply chain beyond its limits and led to severe quality-control challenges. Suppliers took extraordinary measures to keep up, leading to an antibiotics scare in the local poultry supply chain. This caused a sharp decline in revenues in 2013 and hurt the brand’s reputation.
Where did Yum! go wrong?
The company should have invested more in the institutions and infrastructure needed to support a sustainable approach to expansion; the wider context of the fast-growing, emerging market they were tapping had not kept pace with demand. Ultimately, KFC managers took a long-term view, factored-in the contextual gaps, and developed more sustainable practices by investing in, establishing, and certifying its suppliers, and by letting consumers know about their efforts to ensure the quality and safety of their food.
The second challenge, inclusivity, stems from the limited economic inclusion of market segments—usually those not yet reaching the middle class and offering limited profitability in the near-term. Classic business strategy would dictate that companies focus their resources on the most lucrative markets, and avoid less-profitable or unprofitable segments. However, in emerging markets, companies must weigh the value of focused growth against larger, more-sustained growth driven by an inclusive market strategy. Predicating an emerging market strategy on the middle class alone, without a plan to serve the less-lucrative segments at the bottom of the pyramid can prove an expensive bet. The Swiss food and beverage company Nestle, for example, built its strategy in Africa on serving the growing middle class but grossly over-estimated its size. As a result, the company recently announced a 15 percent reduction of its workforce in 21 African countries and cut its product offering by a half. It will now have to re-calibrate and decide whether to reset its targets in Africa and target lower-income consumers.
Overly narrow focus on middle-class customer segments in emerging markets not only is risky, but also can cause companies to miss longer-term growth opportunities presented by significantly larger, poorer market segments. Often, local companies emerge and capture these segments. The potential for such competition requires that multinationals develop their own products—ones that are affordable, accessible, and appropriate for a low-income market. Some companies are even seeing the value of including the bottom-of-the-pyramid populations as suppliers and distributors.
In sum, a strategy for integrating sustainable and inclusive business activities (SIBA) with core business activities is critical to capturing the value of growing emerging markets. With this in mind, we studied more than 40 companies, their organizational contexts, and factors governing managerial incentives to invest in SIBA to explore: why and how companies invest in SIBA, how to improve organizational structures and practices, and how to motivate managers to better integrate SIBA with core strategic business choices. We found:
- An absence of commonly accepted language. It is important that we develop a common understanding of SIBAs in clear business terms—versus academic, external activist, or consultant terms—and make this language integral to external communications, business processes, and internal communications about managerial incentives. Currently, there is a profusion of jargon and buzzwords around SIBAs, and managers have difficulty advocating for their benefits—without a common language that enables them to make a strong business case for why these efforts are worthwhile, they cannot effectively communicate, secure budgets, and integrate SIBA with core strategy. As a result, many consider such activities “special” and confined to discretionary spending. They are relegated to a philanthropic corporate social responsibility office or used primarily for marketing purposes, separate from core business and profit-and-loss concerns.
- Too many business case rationales, fragmenting support. Business cases rationalizing SIBA cover a wide range—from risk avoidance to the pursuit of growth—even within the same organization. Internal champions are critical to making the case for SIBA, but different factors motivate different decision-makers. A procurement manager, for example, may find risk avoidance compelling, while a country manager responsible for business-building may find market penetration and growth more compelling. All of this can make it difficult to coordinate SIBA investments behind core galvanizing objectives with a critical mass of management support. Not surprisingly, having senior leaders set the agenda can help unify and coordinate company behavior; Unilever’s company-wide Sustainable Living Plan and MasterCard’s initiatives on financial inclusion, championed by their respective CEOs, are outstanding examples.
- Barriers to implementing SIBA at scale. Primary barriers include: 1) identifying a natural organizational home for SIBAs, 2) overcoming local complexities in emerging-market contexts that hinder execution, and 3) consistently measuring the impact of SIBA investments. Organizational units designed to deliver innovation can help inform the integration of SIBAs, and help companies develop an “ambidextrous” organizational structure that balances current business goals and short-term performance outlook with investing in initiatives with longer-term payback. Companies will need to develop dual sets of goals, compensation systems, talent recruiting, and management processes that accomplish parallel objectives: exploiting currently profitable market opportunities and exploring new opportunities that can meet future profitability goals. When it comes to local complexities, companies can often tackle these through partnerships with entrepreneurs, local firms, NGOs, and the public sector. They can also look to social enterprise monitoring and evaluation, and impact investing metrics as they develop approaches to measuring the return on SIBA investments.
- A core competency trap. Contextual gaps include missing elements in several industries’ value chains. Consider the case of an agri-business company such as Olam, which is reliant on multiple sectors—agriculture, infrastructure, fertilizer, export, etc.—to sustainably source its products in sub-Saharan Africa. Each was a weak link in its supply chain—under-developed, fragmented, under-funded, and unreliable. To fill such gaps, companies may need to step into the breach and extend beyond their core competencies by adding to their business activities, transferring technology, or infusing capital and other resources. Olam strayed well beyond its core competencies in setting up public-private partnerships in Gabon to develop smallholder farming, building infrastructure, fertilizer plants, and a special economic zone. This may seem antithetical to classic strategy, which encourages executives to focus on the most attractive parts of the value chain and concentrate on core competencies. Overcoming this “trap” and overriding what is ordinarily good generic strategic advice presents a significant challenge for many organizations.
While these challenges are all internal to corporate organizations, we have found that it is hard for managers to act on SIBA in isolation. External players such as foundations, impact investors, and NGOs can complement corporate initiatives in several ways, including:
Setting guidelines for impact and performance (for example, profitability, time horizon, and social and/or environmental impact at scale)
Developing an “evidence base” to evaluate SIBA business cases through a repository of comparable, high-quality data
Developing actionable toolkits and best practice case analyses
Offering a forum for knowledge-sharing, innovation, and pre-competitive collaboration on industry-wide protocol, guidelines, and standards
Facilitating dialogue on policy priorities and public-private partnership opportunities
SIBA will require that companies reconsider their organizational structure, including what language and metrics to use, how to make the business case, and how to structure managerial incentives. Given the size of emerging-market opportunities, a strategy that integrates SIBA with core business promises that “growth for good” will, inevitably, coincide with what is “good for growth.”