5 Ways to Fend Off Challenges From Emerging Economies

The Global Fortune 500 list includes the 500 largest companies around the world in terms of revenues. The single biggest trend on the list over the last decade has been the fast-growing number of companies from emerging economies. In 2000, only 5 percent of Global Fortune 500 companies were from emerging economies. In 2010, that number jumped to 17 percent. In the latest 2013 list, more than 25 percent (127 companies) of all Global Fortune 500 companies came from emerging nations. This trend is now altering the global economic landscape in ways that both potentially benefit and disadvantage middle-market companies like yours.

Meet the challenge from booming companies in emerging economies by using these five tips.

One thing is certain: The trend will continue. The McKinsey Global Institute forecasts that 46 percent of all Global Fortune 500 companies will be from emerging economies by 2025. According to McKinsey, the impact goes far beyond just numbers on a list: "Such up-and-coming companies could disrupt entire industries by designing superior products at lower cost, by bringing them to market faster, and by streamlining business processes." Many of these emerging-market companies face unique challenges in terms of inadequate infrastructure, lack of governmental transparency, and low-income customers. But because they overcome such obstacles, these companies are often more agile and adaptable than their counterparts from developed economies and can move faster to seize evolving opportunities in their home markets and, increasingly, overseas markets.

How will this trend impact middle market companies like yours? In the short term, expect more competition for resources, raw materials, talent, and global customers. Multinationals from emerging economies may also be entering your local market to compete for your customers. For example, Mexico's Grupo Bimbo, the world's largest producer of bread, has followed the Mexican diaspora into the United States and is now attracting a wider swath of U.S. customers with its Bimbo-branded products. Bimbo has already expanded into Central and South America and has learned how to effectively localize its products to non-Mexican consumer markets.

In the long run, however, the threat from emerging-market companies disguises opportunities. Emerging markets contain billions of potential new customers for your business. To compete with these companies, you must use their tactics and expand into their markets. Here are five steps middle market companies should be taking right now to meet the challenges from, and seize opportunities in, emerging markets:

  1. Access and leverage intelligence in emerging markets and the companies and customers within them. Trend awareness is important, and there are a variety of resources for keeping up with the latest (such as Bloomberg News and other sites dedicated specifically to emerging markets). Pay special attention to emerging-market companies that compete in your business area, with an eye on the product innovations or marketing messages they use to appeal to emerging-market customers. Be ready to learn and adapt.
  2. Develop deeper relationships in emerging markets with distributors, suppliers, and other business partners who know the landscape better than you. They can be great sources of information to help you identify opportunities and threats coming out of emerging markets. Do not forget partnerships with academia, which may enable you to both develop localized innovations and access emerging market talent. As consulting firm Accenture explains in its report, "The Rise of the Emerging Market Multinational," "[d]eveloped market companies need to build stronger links with local universities, think tanks, and governments [in order] to foster an innovation-enabling environment within emerging economies."
  3. Rethink your distribution and sales networks in emerging markets in order to optimize revenue and be closer to the ground. It may be best, especially when operating in larger emerging markets such as China and Brazil, to take a regional approach. Logistics in the south of Brazil, for example, are at a developed-world level, while the north of Brazil is infamous for its inadequate infrastructure that makes distribution there a major, expensive challenge. As McKinsey Global Institute says, "companies [in developed markets] will need to assess how to organize themselves so that they can sell to a much more diverse and dispersed customer base." Consider operational restructuring and relocations to maximize your reach and revenues.
  4. Localize offerings to meet the differing demands of emerging-market customers. One size does not fit all. Localize your products, prices, distribution, and marketing messages. Knowing what your emerging market competitors are doing is one of the best ways to benchmark what your company is doing, and openness to change and flexibility on your part will reap rewards. Fast-food chain KFC, for example, is booming in China because it has completely adapted its menu to the tastes of Chinese consumers.
  5. Develop cross-cultural business capabilities, both as an individual and an organization. Learn to challenge your own cultural assumptions. If you don't, your customers in emerging markets surely will - to your disadvantage. Communication, negotiation, and business practices are highly driven by culture. Your supplier in India, for instance, may tell you that something "is a real challenge," but may actually be saying "it's impossible." Nuances of communication matter. Misinterpretations can leave hard feelings and broken relationships on all sides. In Brazil, for example, you may need to spend more time in social conversation before turning to business. Such is the case in China, too. Learn the do's and don'ts, and then put them into practice. Companies and customers in emerging markets have worked hard to gain respect - and now expect it.

Boston-based Chuck Leddy is an NCMM contributor and freelance reporter who contributes regularly to The Boston Globe and Harvard Gazette. He also trains Fortune 500 executives in business-communication skills as an instructor for EF Education. Circle him on Google+