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Emerging Markets and Blue Ocean Strategy

By Siddhartha Roy, Tata Group

Turbulent times have hit both Organization for Economic Cooperation and Development (OECD) and emerging country economies. Deceleration in growth rates of gross domestic product (GDP), consumer expenditure, and international trade has put corporate earnings into a tailspin. At the same time, the competition for a share of the consumer's wallet is becoming more severe. In Chan Kim and Renee Mauborgne's parlance, the `Red Ocean' is becoming bloodier (Borengaser/Jenkins 2008). With competition in existing markets (Red Ocean) becoming more intense, many businesses are seeking opportunities in new geographies. Emerging markets such as China, India, Indonesia, Brazil, and others do provide opportunities. Nonetheless even these markets have limited white space, as local firms and the early-bird multinationals are already safely ensconced there. This limits the scope of arbitrage opportunities through geographical extension in emerging economies. Additionally, the emerging countries are increasing their connections with the OECD economies. Strong linkages exist in terms of capital flows, investment, and trade. The impact of the international meltdown also affects emerging economies such as India, China, Indonesia, Brazil, and Mexico. Yet to some extent, many of these countries have large domestic markets that are insulated from external chaos. Companies can further extend or stretch their markets in many product fields through the creative application of Blue Ocean strategies. services. Entrepreneurs have grappled with this issue for decades before the arrival of the stylized concept of Blue Ocean. The current competition paradigms, such as structure conduct performance, five forces model and Blue Ocean strategy, base themselves largely on the experiences of developed countries. Several questions need to be answered within the context of emerging economies: · How often do firms identify Blue Ocean opportunities in emerging economies? · What is the nature of its value innovation? · How sustainable is the proposition?

EXAMPLE: LAUNDRY SOAPS AND DETERGENTS

COMPETITION PARADIGMS

The question that resonates across economies and industries is how to build unassailable value innovations which create new customers for specific product groups or

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In the early seventies, the Indian fabric wash market was divided into two distinct categories, laundry soaps and detergents. Laundry soap prices and quality fluctuated based on current vegetable oil and fat prices, and the laundry soap market was largely fragmented. The detergents market, which could be further sub-divided into bars and powders, was evolving. Initially the Indian subsidiary of Unilever was the dominant player in this market. In 1969, a small scale entrepreneur started detergent powder production in his backyard. He priced his brand, Nirma, at around one third the average retail price and at 75% of the quality level of existing detergent powders. This product acquired a perceptible market size by the beginning of the 1980s. Further, he created intensive distribution networks in the Western Indian region where he was located. He had lower capital costs, as his manufacturing process did not use a `blowing tower' like other large scale detergent manufacturers. A greater dependence on soda ash in the

Competitive Intelligence

emerging markets and blue ocean strategy

product formulation enabled him to keep the material costs low. Consumers accepted the level of product performance, although the product was harsh on hands in bucket wash situations. The Nirma brand developed a strong clientele amongst households at the lower end of the income pyramid. By the mid-1980s it gained about 30% share of the detergent powder market. Emboldened by this success, in 1987 he also launched a detergent bar. To counter Nirma's market penetration, the Indian subsidiary of Unilever launched a brand called Wheel which matched Nirma in most of the elements of cost and business systems. To do this the company had to move away from capital intensive blowing tower technology and deliver a product formulation that would provide superior performance at a matching cost. Furthermore, the Wheel brand had to be supported by a focused communication and branding exercise to carve out a decent tonnage for itself. The bulk of this tonnage gain did not come from market share gains within detergent powders, but the major factor was market expansion: former nonconsumers of detergent powders (most were laundry soap users) became detergent powder users. Within the overall fabric wash category detergent powders substituted laundry soaps. In the early years a significant part of Wheel's growth came from laundry soaps. Marketing efforts carried out by the two competitors, Nirma and Wheel, led to overall detergents market expansion. Consequently, in the fabric wash market laundry soaps tonnage started declining as soap users, particularly those in the lower income groups, were converted into customers of detergents. This value innovation and development of new customers makes the Nirma-Wheel saga an useful example of Blue Ocean strategy.

In each of these two cases value innovations driven by small scale entrepreneurs brought about a structural change in the markets. The demand curve shifted to the right, and the average price point dropped significantly. An interesting aspect of emerging market economies is that demographic as well as economic growth leads to market expansion. Markets in these economies grow when more people are using the product (penetration growth) or through increase in usage (quantity used per capita goes up). Normally, penetration growth of a product category in an emerging economy like China, Brazil, South Africa, or India is faster than the increase in the usage depth. Consequently, several players have the space to grow for several years. This is an issue worth pondering over. The first principle of the Blue Ocean strategy is to reconstruct market boundaries to break from competition and create blue oceans. Barring toilet soaps and detergents (which have 90% penetration rate), many personal care products have much lower customer percentages, even in urban India. For example, for color cosmetics it is 22%, deodorants 9%, and diapers 2%. In the rural areas where purchasing power and media exposure are limited, usership is lower than urban areas. As the income, education and media exposure grows, consumer levels go up in urban as well as rural markets. Over six per cent per capita income growth in the last five years have accelerated this expansion, but the average quantity used per household or person increases rather slowly. From the blue ocean strategy point of view, the key is to use value innovation which can expand the contours of the market in the low usership areas and amongst non-users located in the smaller towns and rural India.

EXAMPLE: AUTOMOBILE SECTOR

EXAMPLE: SHAMPOO PACKAGING

In the early 1990s Indian hair care market, the government considered shampoos a luxury product and subjected them to a 120% excise duty. Consequently, the price of a 200 ml bottle was much higher than the daily wage of an industrial worker. In the mid-1980s, an innovative small-scale entrepreneur in South India introduced a single-use shampoo `sachet' at a very low unit cost. The packaging was a major value innovation in terms of affordability and price point. It sharply increased the customer base for shampoo as the focus on unit value significantly helped in converting non-users into customers. All the organized players and multinationals followed suit and the shampoo market growth exploded, further aided by the government's lowering of excise duties on the product. Towards the end of the 1990s, the sachet market segment held more than two thirds of the total shampoo market.

One of the key tenets of Blue Ocean strategy is to avoid head-to-head competition and look for blue oceans through market reconstruction. This effort targets new customers by looking across alternative industries, and different strategic groups within an industry. Take the automobile industry for example, with established categories in terms of price and performance such as the luxury segment, economy segment which includes small cars and compacts, etc. Usually no company attempts to create a discontinuity in terms of the price performance relationship or the way a segment is normally defined. Herein lies the opportunity of creating a blue ocean. Another cornerstone is value innovation. In the value/ price trade-off, blue ocean strategy differs from traditional competitiveness strategy. Traditional strategy focuses on the trade-off between creating greater value (differentiation) at a relatively high cost, or providing reasonable value at a low cost. The idea behind blue ocean strategy is to provide both at the same time.

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Volume 13 · Number 1 · January/March 2010

emerging markets and blue ocean strategy

Blue ocean strategy provides a framework for initiating four types of action which identify: · Factors that the industry takes for granted but can be eliminated. · Factors that can be reduced. · Where the value offerings should be raised. · Which new factors to create that increase the value offerings. In a blue ocean strategy one restricts consumer choice by either eliminating or reducing certain product offerings on one hand, and on the other certain offerings are either

increased or created. Put together, these four types of actions create the eliminate-reduce-raise-create framework. Keeping these in mind, let's examine two examples from the automobile sector. The first is the Tata-Nano, a small car which has already created ripples amongst automobile enthusiasts around the world. The second example is the small truck called Tata-Ace (see Sidebar). Scaling up of these two vehicles has been very rapid. More than 200,000 orders for Nano were placed during the bookings period of April 9th through April 25th. Within two years of its launch in 2005, 100,000 Ace vehicles have been sold. In both cases, product differentiation coupled with cost focus provides a sustainable competitive advantage.

SIDEBAR: TATA NANO AND TATA ACE

Tata Nano (passenger car)

Targeted new customers: · Upgradetwowheeler(i.e.motorcycleandscooter)usersintoafourwheeleruser. · Upgradingcanprovideahugeopportunity(passengercarmarketinIndiais1.2M,twowheelersalesare7.4M). Nature of value innovation: · Spacious,passengercompartmentforfouradults. · FuelefficiencyhighestforanypetrolcarinIndia(23.6km./liter). · Highfuelefficiencypluslowcurbweightequalsverylowlevelofemissions. · Safetytestexceedsregulatoryrequirements. · Basemodelcostaround$2,500. · FourActionsFrameworkfornewvaluecurve(basedoneliminate-reduce-raise-createstructure) · Standardmodelisanofrillscar. · Comesinonlythreecoloroptions. · Focusonsafety,fuelefficiency,andpassengercomfort. · Bestlegspacecomfortinthesmallcarsegment. · UpgradedfeaturesavailableinNanoCXandNanoLX.

Tata Ace (mini truck)

Targets new customers: · Attractiveupgradeofthreewheelerusersintosafer,morecomfortableandeasy-to-drivefourwheelvehicle.(Pricedaround $4,500.) · Customerupgradesprovideshugeopportunity(2005totallightcommercialvehiclesalesinIndia200,000;threewheelersales 350,000). · Fitsintotheincreasinguseofhubandspokemodelinlast-milegoodsdistribution. · Avoidspotentialgovernmentrestrictionsontheentryofheavyandmediumtrucksintocitiesduringhigh-traffichours. Nature of value innovation: · Sizedasasub-onetoncategoryvehicle.Indenselypopulatedurbanareas,streetsarenarrow,requiringminitruckswithadequat maneuverability.Inruralareastheyprovidesmallproducersconnectionstonearbyurbanmarkets. · Oneofthefewminitrucksintheworldwithtwincylinderdieselengine. · Maintenancecostandrunningcostslowerthanthreewheelers,whichimprovestherateofreturnfortheoperator. · FourActionsFramework:(basedoneliminate-reduce-raise-createstructure) · Notalongdistancetruck.Maximumspeedhigherthanthreewheelersbutrestrictedtowithin65kms/hour. · Excellentturningradiusallowseasymaneuverability. · Combinesminitruckreliabilitywithcar-likecomfortinthedriver'scabin. · Providesaplatformforfurtherproductextensionatbothendsofthemarket:ruralpassengerandsemiurbantransport,and specialistlogistics.

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Competitive Intelligence

emerging markets and blue ocean strategy

The high volume generation through value innovations makes the strategic advantage more sustainable, as it places imitators at a cost disadvantage. In addition, the technical platform created by the mini truck Tata-Ace has been extended indo developing two new products, Magic and Winger. These multi-passenger commercial vehicles once again take the company to a new value curve. Finally, the value innovation of Tata Nano buttressed by media reporting has created a brand buzz which imitators will find difficult to counter both in the country and other geographies.

EXAMPLE: MICROFINANCE

Another example of making competition irrelevant is the micro finance institutions working amongst the poor. Traditional wisdom suggests bankers should avoid lending to the rural poor in less developed and developing countries. Until recently banks held the general belief that the business of extending micro finance can never be a profitable activity. Given the vast multitude of rural poor across geographies this is clearly a large Blue Ocean. Bangladesh Grameen Bank showed that once the bankers learn how to work with the poor through microfinancing, they can develop increased returns by harnessing hundreds of micro entrepreneurs. The success of Grameen Phone, a mobile telephony joint venture between Telenor and Grameen Bank, also emphasizes this point. Extending mobile telephony use amongst previous non-customers like farmers and fishermen ­ in any country, be it China, India or Indonesia ­ requires an understanding of which add-on service provides exceptional utility to these customers and their acceptable price point. For example, informing fishermen who are out in the sea about the prices and landings in different ports or sending an early indication about a shoal of fish based on satellite imagery can be of immense commercial utility to them. Obviously the company's cost structure will have to be adjusted to meet the requirements of these customers. This thought is very similar to the Blue Ocean Idea Index suggested by Kim and Mauborgne ­ sustainable competitive advantage can only be derived by being increasingly useful to the consumer. The Blue Ocean idea index has four essential tenets: · · · · utility to the consumer affordable price affordable cost to the manufacturer ease of adaption

The examples provided in this paper suggest that businesses in emerging economies have already understood the need for seeking out new target groups of consumers and for expanding the market in order to survive and grow. These businesses also identified which value innovations should be included in their offerings. In most cases, differentiation and cost focus have been combined, avoiding an either/or situation. Thirdly, through trial and error, entrepreneurs have also determined which factors connected to their products or services should be decreased or eliminated and which ones should be increased or added de novo. The contribution of Kim and Mauborgne's Blue Ocean strategy lies in providing a theoretical structure and an analytical construct for the empirical evidence. Viewed from that perspective, Kim and Mauborgne's framework hopefully will enable lesser mortals like strategy planners to develop the necessary business insight which comes naturally to legendary entrepreneurs.

REFERENCES

Borengaser, Stephen; Jenkins, Anne (2008). "Applying the blue ocean strategy," Competitive Intelligence, July/ August, v11n4, p17-22. Clayton, Christensen (1997). The Innovator's Dilemma: When New Technologies Caused Great Firms to Fail. Harvard Business School Press, Boston. Clayton, Christensen (2004). Seeing What's Next, Harvard Business School Press, Boston. Hamel, Gary (1998). "Opinion: strategy innovation and the Quest for value," MIT Sloan Management Review. Kim, Chan W; Mauborgne, Renee (2005). Blue Ocean Strategy. Harvard Business School Press, Boston, MA. Porter, Michael E. (1988). Competitive Advantage, New York Free Press.

Dr. Siddhartha Roy is Economic Advisor to the Tata Group. He has nearly three decades of research and in-house consultancy experience in the areas of competitive strategy, macro and micro econometric modeling, strategic planning, country/ firm competitiveness studies, pricing research, new opportunity identification, etc. Siddhartha has first hand knowledge of the examples mentioned in the text; both as a midfield player and also as a spectator on the sidelines. He can be contacted at [email protected]

All four elements can be found in the telecom example above. However, for a traditional telecom multinational, adoption of these practices would require major cultural and operational changes. Unless they are accomplished, it would be very difficult to become a successful competitor in the rural and semi-rural markets of the emerging countries.

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