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Does size matter? The advantage of being a small firm in an emerging market

Strategy

by HSBC

James Chan, CEO of Asia Marketing and Management, thought he had the perfect marketing strategy in mind when his client asked him for help breaking into the Chinese market. He suggested that Kingsbury —a Philadelphia-based manufacturer of ultra high-end bearings for complex industrial machinery—invest in a mass mailing to all of China’s power stations.

The strategy, it turns out, was less than perfect. “It was a waste of time and money,” Mr Chan admits. Most of the power stations were too small or unsophisticated to benefit from the Kingsbury products, and the companies that could use the bearings were unimpressed by a generic mailing.

With annual revenues of US$50m, Kingsbury could not afford to take big risks on a marketing strategy in an unfamiliar market. But as a small firm, it did have the flexibility to learn from its mistakes and develop a new strategy quickly. When Mr Chan’s initial mail-shot strategy in China failed, he was able to rapidly regroup. Because he worked directly with the leadership at Kingsbury, he did not have to go through a complex decision-making process or test pilot new marketing strategies. He simply came up with a new plan, got the go-ahead and began executing it in a matter of days.

This time, instead of throwing his marketing net so broadly, he focused his sales efforts on the top ten companies in the market. Over several weeks, he made calls and personal inquiries, then flew to China to make presentations over a two-week period to executives at all ten companies. Most of those organizations ended up purchasing the bearings and remain loyal customers today.

Small is beautiful

Having the freedom to make rapid course corrections without the weight of bureaucracy is a powerful tool for smaller companies moving into unfamiliar markets, where trial and error is often a necessary part of finding one’s niche. Of course, limited resources and access to talent can make it difficult for smaller firms to break into new markets and to grow in order to keep up with local demand. But, an ability to rapidly reinvent themselves for new consumer groups can give smaller firms an edge over their more globally established, larger and wealthier counterparts.

Small and mid-sized companies enter foreign markets with less overhead, flatter hierarchies and a more entrepreneurial approach to the market, says Ken Esch, a partner in Price Waterhouse Coopers’ private company services practice in Chicago. “They are more agile than larger firms,” he says. “They have the flexibility to try new products quickly, and if they don’t work, they can move on to something else.” Indeed, smaller firms must leverage these strengths as the race to set up shop in foreign markets heats up. According to a 2011 Price Waterhouse Coopers survey of 236 executives in the US, 51% of private companies plan on expanding overseas in the next one to two years, and 48% already have a global presence. Among these firms, 74% are focused on fast-growing emerging markets.

Yet, many firms are also discovering that the strong allure of emerging markets is often matched by the difficulty of selling products in them. A recent Deloitte survey of 628 executives worldwide found that 31% of companies fell short of their projected revenue goals for emerging market sales in 2011, largely because they are struggling to meet lower price point demands, develop brand awareness and compete against local businesses.

While larger firms may have the resources to stick it out for the long term and slowly build their market share, smaller firms can enter the same markets on a much smaller scale. By partnering with local firms, managing their operations remotely, and hiring only a few key staff, they can test the waters for their products or services, and build their brand for less cost and with smaller teams. Entering a new market with a specific product or service is still a risk for smaller companies, but it is not a commitment. A smaller company that has fewer heads to convince has the flexibility to change its location, its product or even its business strategy.

Change perspectives—if not your own, then others'

Team Launcher, a Miami-based recruiting firm, has developed its own unique approach to establishing itself in new locations, while making the most of limited funds and human resources. The firm ‘leases’ talented employees that provide services such as writing, graphic design and computer programming in India and the Philippines for global clients. But Tadd Rosenfeld, the firm’s CEO, does not spend much money on real estate to get a new office up and running. Instead, he simply negotiates for space in an existing firm for a few core employees until he gets a sense of whether the market has potential.

If he decides to stay, he uses his company’s relative anonymity to cut deals on advertising and office space. Larger companies with a well-known brand, like Apple or Google, are typically forced to pay top rates, Mr Rosenfeld says. “They can’t get away with trying to cut deals, but we can.”

Once he has necessary logistics in place, he repositions the company to make it appear larger and more well-established. He purchases full-page ads in local papers, buys splashy billboards, and invests in plush offices in nice neighborhoods to establish Team Launcher’s name as a leader in the recruiting management industry.

“Even the smallest player can position itself to look like a major firm in the mind of emerging market locals,” Mr Rosenfeld says. “For a small firm, that’s a big advantage.”

While smaller firms may want to present themselves as a large company, their strength lies in precisely their size. Their ability to adapt and reinvent themselves allows them to understand consumers, adapt to their environment and take risks. As Mr Chan illustrates, working in emerging markets requires taking the plunge—and doing it again.

To share your perspective and observation on trade with China please contact Luke Qin at luke.qin@nzcta.co.nz