As the BBC rapidly runs out of content to show due to the pandemic shutdown, it has been showing repeats of Dragon’s Den. One common feature of that programme is entrepreneurs trying to launch a new product or solution in an existing market. All too often, these pitches end with the Dragon’s rejecting the invitation to invest in the product with the refrain of ‘I’m out’ or ‘there isn’t a market for your product’.
Trying to launch a new solution to an old problem is probably the hardest thing to do in business. Why invent a new product to dig a hole when solutions like spades and mattocks already exist. The new product needs to be better than the existing solution. In fact it probably needs to be better over a range of criteria; ergonomics, price, availability, value for money, durability, etc.
That doesn’t mean there aren’t new markets and a space in the world for new product solutions. New markets emerge all the time. In the 1960’s no one foresaw the home computer; when apple launched the iPad, they were derided for launching a product no one wanted or needed.
So what is an emerging market?
Generally, emerging markets are defined as newly-formed or re-formed industries driven by technological innovation, shifts in cost relationships, the emergence of new consumer needs or other changes in the economy or society.
A factor of emerging markets is that there tends to be few ‘rules of the game’. How the market is expected operate hasn’t been established.
There are common structural factors which characterise emerging industries. these relate to the absence of established bases of competition and the initial small size of the industry.
- Technological uncertainty: What is the best technical configuration of the new product category. For example which is better, a lithium battery car or one powered by a hydrogen fuel cell.
- Strategic Uncertainty: There appears to be ‘no right’ strategy. Different market players approach the market in different ways e.g. positioning, supply chains, distribution, customer service, etc. Products are configured differently or different production technologies. For example, the common layout of the pedals in a car took many years to become established. Different models of car used to have different layouts of accelerator, brake and clutch. Strategy can also be uncertain due to a lack of information about prospective consumer groups and the actions of competitors.
- High Initial Costs but Steep Cost Reductions: New products in emerging markets tend to begin with small production volumes. There is a lack of experience in producing the new product so manufacture takes longer and there can be increased wastage. However, the production learning curve can lessen rapidly and as workers become more experienced in its production. Firms develop better, more efficient processes and procedures. Productivity can rise rapidly as sales increase.
- Prevalence of Embryonic Companies and Spin-offs: New technologies see a lot of new market entrants.
- Consumers tend to be first time buyers: Marketing is focused on product take up or getting consumers to switch to your new offer.
- Planning for a short-time horizon: the pressure in the market may be to meet rising demand for the new technology. market players suffer production bottlenecks and a lack of production capacity. The focus in the business is on the now: firefighting current problems; not looking to the long-term future. For Example, when Tesla launched its 3 model electric car, it lacked the production capacity to meet demand and customers faced long delays in obtaining their vehicle.
- Subsidy: There may be government subsidy of new market entrants particularly in areas of societal concern. For example, the UK government subsidised the insulating of people’s homes and the installation of solar panels. Currently the UK government is subsidising the search for a Covid-19 vaccine. The UK government is also interested in creating ‘gigacities’ large battery farms to store electricity generated through wind and solar. But beware, subsidy can skew a market and make the market dependent on political decisions.
Emerging markets can experience early mobility barriers. New markets often rely on proprietary technology and manufacturers may have significant control over supply and distribution channels. They may hoard access to raw materials e.g. the UK is looking to build factories to produce the batteries for gigacities but lithium, the metal used in the batteries is extremely rare and difficult to obtain. there may be a lack of skilled labour to produce the new technology and the market may lack cost advantages of experienced workers. This lack of cost advantages can be made more significant through the newness of the technology needed to produce the product and through competitive uncertainties. Likely there will be significant risk in the sector and thus the opportunity cost of capital can be high.
The nature of entry barriers in emerging markets is a key factor. Often success in these markets is less from the need to command massive resources and more from the ability to bear risk.
So what are your strategy options in an emerging market:
- You act to shape the industry structure: You get to set the rules of the game through your product configuration, your pricing strategy and your marketing approach.
- There are externalities in industry development: there is a balance to achieve between industry advocacy and the self interest as to your market position. You may have to ensure that industry players are, in some way, interdependent on each other. this can be through setting industry standards, setting up trade bodies and establishing industry codes of practice. The big supermarket chains are all members of the British retail Consortium which sets standards as to product quality and supply. Those firms that do not comply with these industry standards can be forced to disappear if they refuse to accept industry norms.
- You can change the role of suppliers and channels: you may be able to shift the orientation of suppliers and distributors by getting them to accept your procedures and standards.
You have to make big decisions when entering an emerging market. Do you pioneer in the market or do you act as a market follower. Being fist in can be a benefit but it can also be risky. Sega were first in to the computer game console market but suffered as Microsoft and Sony undercut their pricing structure. This is also an example of existing firms seeing your emerging market as an opportunity and using their existing scale and resources to drive you out.
Pioneering in an emerging market can be high risk.
Entry into a market is appropriate when:
- The image and reputation of your firm is important to the buyer e.g. Nike entering the golf club market
- Early entry is to initiate the learning process i.e. get ahead of the learning and experience curves. Experience is difficult to imitate.
- Customer loyalty offers great benefits and those benefits lie with the first on the market.
- Absolute cost advantages can accrue through securing the purchase of raw materials.
The following tactical moves:
- Commit to the suppliers of raw materials – become their favoured customer
- Finance ahead of actual need.
- Entry to the market MUST be as a result of careful strategic analysis.