A New Market Power: The 86 Percenters

 

Takeaway

  • 86% of the world’s population lives in the developing world.
  • Companies in the 14% percent of the world need to adapt a new mindset to compete globally.
  • Businesses that are succeeding have created their own inroads without waiting for current infrastructure to improve.

Eighty-six percent of the world’s population lives in developing regions, and by 2020, it’s believed those markets will contribute more than 50 percent to the world’s GDP. This signals an upcoming shift of power and influence that companies in the other 14 percent of the world need to adapt to.

Recently, McCombs professor Vijay Mahajan spoke with writer Zara Rubin of the African Business Review to explain why companies with enough ingenuity to create inroads in these markets will reap the biggest rewards. The following is an excerpt. 


Vijay Mahajan is well known for his research regarding business opportunities within the world’s developing markets. Eighty-six percent of the world population lives in the developing world, where the GDP per capita is less than $10,000 dollars. The other 14 percent lives in the developed world and, until recently, have been the most important market for most global brands. Professor Mahajan’s extensive research in China, Africa, India, and the Arab world posits that in the future, the most exciting opportunities will involve the 86 percent in developing markets. However, companies in the 14 percent world have to change their mindset in order to engage with the 86 percent in the developing world.

Professor Mahajan has famously labeled this somewhat rigid way of thinking as the “2,400 square feet” mindset, based simply on the size of the average American family home consisting of one family room, a breakfast area, a two-car garage, and the buy-one-get-one-free culture. Marketing strategy for the global brand is entirely dictated by, and constructed around, this mindset but fails to consider realities in the 86 percent world, where GDP per capita is far below $10,000. Consider Mahajan’s example of a professional man and his wife and children in New Delhi. Such a family would typically inhabit a 750 square foot apartment with a smaller kitchen and fewer, smaller appliances. There would be less storage space, which would mean more frequent visits to the local market or shopkeeper. Buy-one-get-one-free offers would therefore be of little use to this family unit, without the space in which to store additional extras. Foreign companies who want to do business with the 86 percent world must therefore change their approach to incorporate the habits and everyday standards of living of this vast consumer force and formulate new rules of engagement.

The Indicators for Growth

Professor Mahajan was asked what attracts foreign businesses to Africa, given the low GDP levels and its infrastructural challenges. His view is that opportunities abound for those who look beyond the GDP and similar statistics. These statistics constitute a yardstick that originated from developed markets, and when used as a measure in the 86 percent world, fail to adequately expose opportunities there. According to Mahajan, there are opportunities anywhere where the GDP per capita is close to $1,000. What, then, are those indicators for growth?

One, which is not immediately apparent to the foreign observer, is the “shadow economy,” or “black market” that operates beneath the legitimate, regulated economy. Professor Mahajan maintains that the GDP per capita does not present a complete picture. Looking at the GDP of most African countries, one might expect that the mobile phone would be an unattainable luxury for most of the African population, but the mobile phone industry in Africa tells a different story: Africa is the fastest growing mobile market in the world and the second largest after Asia (it is likely to surpass Asia in the very near future). In a 2011 report, the GSM (Global Systems for Mobile communications) Association predicted that sub-Saharan mobile phone subscribers would exceed 735 million by the end of 2012 (GSMA Africa Mobile Observatory 2011 report). The population of sub-Saharan Africa is estimated to be about 830 million in 47 countries. The shadow economy is therefore fundamentally important, and its size is a strong indicator of growth.

A second indicator relates to the percentage of the economy controlled by consumers and is of great concern to brand marketers. In the US, the consumer-mass controls 70 percent of the economy, and the remaining 30 percent is accounted for by the government, federal, state, and local governments. Regarding emerging markets, Africa is more consumer-driven than China and when comparing the average consumption expenditure per capita for both Africa and China, it is evident that a large portion of China’s economy is controlled by the government, with the consumer controlling around 27 percent. The African consumer, on the other hand, averages about 49 percent, almost half of the African economy. This again illustrates why African markets present such exciting prospects. Wherever the government has less control than the consumers, the consumers are then in a position to demand goods and services, and there lies the opportunities for foreign as well as local businesses.

It is estimated that by 2020, developing markets will contribute over 50 percent to world GDP. If this forecast holds true, Professor Mahajan’s view is that this would give the 86 percent club a new, formidable power and influencing concerning the flow of commodities and trade in the global economy.

Visit the African Business Review to continue reading.

 

The McCombs School of Business is dedicated to educating the leaders of tomorrow while creating knowledge today that shapes industry, society, and policy. Ranked 5th in the world for research, McCombs has one of the most productive faculties of any school, public or private. We educate more than 12,000 students each year and instill in them the desire for intellectual inquiry and integrity that defines The University of Texas at Austin. 

At McCombs, discovery shapes learning and practice.

 

Image credit: NASA / Flickr Creative Commons

 

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