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Expanding into New Markets

Mind your Business - 19 February 2007

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Expanding into New Markets

You are very likely to have heard that India is one of the fastest growing economies in the world - its 2006 growth rate is estimated at 8.6%. Yet despite the fact that it is undoubtedly experiencing strong growth, large amounts of the population are still very poor. Estimates put the number living below the poverty line at over 25% of the 1 billion-plus population - that's more than 250 million people.

Various standard of living measures also highlight some of the anomalies that exist in the country:

  • Around 40% of the population over the age of 15 cannot read and write
  • 60% of the population work in agriculture
  • The official unemployment rate stands at 7.8%
  • The top 10% of the population account for over a third of all consumption and 53% of the wealth of the country whilst the bottom 10% account for only 3.5% of consumption and 0.2% of wealth
Cows pulling a plough Women carrying water pails on their head

Farming still is a major part of the economy of India. The gap between rich and poor in this vast but heavily populated country is stark. To what extent will this change in the coming years? Where do companies want to be if they want to see market growth? Copyright: Vasant Dave, from stock.xchng.

The size of the population and the growth prospects of India, however, make it an attractive place for many western companies, not least mobile phone companies looking to establish a foothold in the market.

A number of mobile phone manufacturers are looking to try and exploit the potential of this vast market. At the end of 2006, there were a reported 137.4 million subscribers to mobile phones in India. That is only just over 10% of the population, which leaves a great deal of potential growth in the market. In 2006 alone, there were 62 million new subscribers. This represents an increase of around 82% on the year.

Mobile phone manufacturers have a problem, however. To get into the market, they face a number of challenges that test their business acumen. The challenges of doing business in India are considerably different to those faced in many western countries.

Theory

There are a number of problems presented when expanding into new markets. We are going to look at some of these in the context of the mobile phone industry in India, but many of the basic principles can be applied to other emerging markets and attempts to get into these areas.

  • Pricing
  • Product
  • Cost of Production
  • Climate
  • Security
  • Technical Issues

Pricing:

One of the main problems for firms looking to expand into emerging markets is the price of the product. In a country such as India, the price of a mobile phone might be a prohibitive factor in enabling an individual to buy one. The GDP per capita for India is $3,700, which equates to around £1,900 a year; even more specifically, that is £158 per month, or £40 per week. This makes it very difficult for manufacturers to penetrate the market. The cheapest mobile at the moment is produced by Motorola, which is selling a basic handset for around $30 (£16). Even so, it is easy to see that this is still just under half a normal weekly average wage in India.

Asian girl texting

Moving into an emerging market might mean that there is no shortage of demand, but ensuring the product meets the needs of that market, and that the handset is affordable and provides the right features at the right price, presents a real challenge. Copyright: Aschwin Prein, from stock.xchng.

Product:

Mobile phones for sale in the west contain any amount of gadgets and devices aimed at gaining some form of competitive advantage. In India, additional features merely add to the cost of the phone and thus push the price up. As a result, firms look to provide very basic handsets that do little more than make calls or send text messages. Screens might be black and white and memory very small. Games and cameras are not likely to be at the top of the features list when targeting a market such as this.

Cost of Production:

Costs of production for mobile phone manufacturers is a key part of the whole issue. If costs of production are high, it follows that prices will have to be higher. If prices are higher then sales are going to be compromised in such an economy - at least in the short term. Costs of production can be cut, as we have seen above, through trimming down the features they offer. That may be a fairly obvious solution. However, providing just a very basic handset might meet the needs of some of the target market, but others will want a phone that does have at least a limited number of features. It may be that text messaging has to be provided in a particular language, for example; providing this type of feature raises the cost of production.

Mobile phone screen showing a received text message

Providing additional features increases the cost of production; the problem is made worse if this has to be in different languages! Copyright: Keli Miles, from stock.xchng.

Other methods of focusing on cost may be to find ways of exploiting the opportunities for economies of scale or finding ways around local tax rules. The latter might involve decisions to set up manufacturing plants in India, where the lower wages would help to bring down manufacturing costs. In addition, the plants could be designed to cater for the lower specification devices needed by the market at this time.

With the economies of scale, many mobile manufacturers already have significant scale advantages, which range from commercial or buying economies (buying component parts at preferential discounted rates), financial economies (being able to raise finance for expansion and the building of new factories in India, for example), technical (benefiting from the principle of multiples and the indivisibility of plant) and managerial economies (where the expertise and skills of the labour force can help to bring down unit costs). It has been estimated that economies of scale could help to reduce the average cost of production by as much as 30%.

Climate:

One of the challenges facing mobile phone manufacturers is the climate in many emerging countries. India is a particular challenge. The heat of summer means that conditions can be quite different to those in the West. Dust can also be a particular problem and in the monsoon season, the rain and humidity levels can also cause problems. As a result, the design of the phones may have to be different and more robust to cope with relative extremes of temperature. In taking climate into account in the design, the costs of production can be pushed up.

Mobile phone screen saying 'SIM blocked'

Security:

Where there is a demand for a product like a mobile phone, there will be some 'entrepreneur' ready and willing to fill that gap in the market. The market for stolen phones that reappear in emerging markets such as India is very high. In addition, transporting mobile phones across parts of some emerging markets is a security risk in itself. Paying for security to make sure that the phones get to their destination is another cost that may have to be considered by manufacturers.

Stepping up security to block the illegal trade in stolen phones and preventing unauthorised transfer and use on different service providers is a key to expanding the market in emerging countries. Copyright: Domantas Jankauskas, from stock.xchng.

The challenge for the manufacturers is to make phones that will not be able to be transferred from one user to another illegally. In other words, they have to try to make phones that cannot be unlocked. If greater security can be built into handsets, the manufacturers are effectively releasing part of the market to themselves rather than losing business to criminal gangs supplying stolen handsets.

Technical Issues:

We have touched upon the problems facing manufacturers in trying to supply phones at low prices and with few features in order to keep the production costs low, as well as the needs of other parts of the market where demand for more features is likely to grow. We have mentioned that there is a very high proportion of the population in India still working in agriculture.

A mobile antenna

The technical problems in providing appropriate handsets might be one factor in expansion, but the infrastructure also needs to be in place. Copyright: Lukas Merkevicius, from stock.xchng.

Whilst urbanisation is expanding fast, many of the population still live in very poor rural areas with limited facilities - not just water but also electricity. Electricity, of course, is needed to charge the batteries that mobile phones rely on; if there are only intermittent electricity supplies, this presents a real technical problem. The solution is to improve the efficiency of batteries - to make the battery life longer. That in itself is not easy and another cost of production that will have to be factored into the equation.

Task:

You can do this individually or if you are in a classroom situation, organise yourself into groups of about four.

Produce a business plan based around a decision by a leading mobile phone manufacturer to develop a production facility in an emerging market like India. You will, of course, not be able to produce detailed financial figures for this, but in your research, you should try to demonstrate an awareness of the issues that you might have to face in doing so. Your research should take into consideration the following areas:

  • An Introduction to the context - this might include a brief country profile of India to help set the scene.
  • The aims of the expansion - the target market you are aiming for and what you would like to achieve. This might be specified in the form of a target market share, for example.
  • An outline of your current business - this might include a summary based around one of the major mobile phone manufacturers (much of this information can be found through their own Web sites). The outline will cover the sorts of products and services you currently provide.
  • An outline of your major competitors and what your market in India might be.
  • An outline of some marketing plans that you think will be appropriate to the Indian market.
  • The skills, qualities and competitive advantage you think you will be able to bring to the market.
  • An outline summary of some of the key financial considerations you will have to take into account. This might include possible pricing options and some thoughts on the major cost implications of the expansion. You can use the market information of these companies.

The references below will help you in structuring your plan, but remember that many of the business plans available online tend to be aimed at those starting a small business. In this case, you are an existing business planning for an expansion so the scale is going to be different.

When you have finished your plan, you could present it as a report for assessment, or you could take it in turns to give a presentation to your classmates and then discuss the different approaches that each group has taken to the plan.


References

Related resources: 
Mind Your Business - Expanding into New Markets
Submitted by aashwin on Mon, 19/02/2007 - 13:00