The replica economy: New strategies for emerging markets

I will either find a way, or make one― Hannibal

 

 

The end of competitive advantage.

Rita McGrath is a professor at Columbia Business School. She is ranked by Thinkers 50 as one of the top thinkers of our time. In her latest book (The end of Competitive Advantage), she came up with a very bold proposition based on a singular idea that competitive advantage as we have been taught is no longer a valid pursuit for businesses that operate in today's postmodern economic environment. This is not only an audacious proposition but one that is highly contrarian. It is against the conventional wisdom made popular by Mike Porter that the objective of every strategy is to create a competitive advantage. A typical strategy development process begins with a current situation assessment. This covers analysis of past and present operating performance and environment in which an entity's performance is bench marked against industry standards. Tools such as Porter Five model forces, SWOT/PESTEL analysis e.t.c are deployed alongside other tools like BCG Matrix with the objective of defining the market share and position of a business in an industry. It helps to understand the dynamics of growth relative to an entity's portfolio. At the end of such rigorous process, an entity is expected to have been able to dimension three factors that represent the fundamentals of any business or industry; Consumers, Cost and Competition. It is on this wise that new objectives are then set and tactics developed. The rest is left to execution. In between, new realities emerge that necessitate executives to adjust.

 

 

 

Contemporary strategy development is based on being able to leverage barriers to entry (patents, trademarks e.t.c) to create competitive advantage for a business. This is what we have done for decades. However, with the turn of the century, we now know that there is nothing like sustainable competitive advantage. Factors of production have become commodities. No business today can claim to have a monopoly of anything. Patents are no longer sure fire defense (Apple vs Samsung). The lines that existed between industries are fast blurring out. Just a couple of months ago, Tesco (a UK retailer) announced its decision to go into telecommunications via its new business Tesco Mobile. Starbucks has since expanded into adjacent industries to create new value equation. You'd be myopic to refer to Starbucks as a Coffee company. New entrants are disrupting entire industries while those that have existed for years are equally transforming. Today, Kickstarter (a crowd funding site) has successfully financed dozens of projects. Today, there are no longer dichotomies. Competitors are co-operating in remarkable ways. P&G created a joint venture with Clorox to create a business in excess of $1 Billion. This is coopetition. When it is difficult to differentiate between who a consumer and a producer is, you know things are no longer what they used to be. Our business vocabulary now includes a new coinage; prosumers; a term which describes what happens when you go to Nike website to design your own sketchers. We are indeed at the cusp of resets and massive changes. This is the era of transient competitive advantages. The objective of this piece is to challenge the conventional wisdom of what and how strategy is considered to be with a view of expanding the frontiers of what choices are available for businesses.

 

 

  

In search of a viable business model

Growth has stalled in Europe. The story is not different in the Americas where recession hasn't quite waned-off. Now the eyes of the world is set on Africa and some others countries. In the last few years, we have had the classification of some countries as emerging markets. First it was the BRIC (Brazil, Russia, India and China) then of recent the MINT (Mexico, Indonesia, Nigeria and Turkey). The underlying logic for these classification is based on a set of economic indicators that suggest that these countries have better return on investment (ROI) which earns them the title of emerging market. These countries share some similar attributes such as large population (relative), low income distribution e.t.c. Although, the population of these markets make them targets for global organisations, international consortium and multinationals seeking growth. In Nigeria, the recently updated Gross Domestic Product (GDP) puts it as the largest economy in Africa. In some certain quarters, it is held that if you are not doing business in Nigeria, you are missing out. The arrival of new brands and millions of dollars in Foreign Direct Investment (FDIs) seem to support this. Last year, Nigeria had the biggest FDI in Africa to the tune of $7.03billion. South Africa was second with $4.572 billion.

 

 

 

Investing in Nigeria and other emerging markets is not a walk in the park. Some of these countries have above average risk profiles making it knotty for investors. The returns however seem to compensate for the risk. Some companies like Rocket Internet (a German-South African technology company) whose consolidation of Sabunta and Kasuwa to form Jumia (an e-commerce platform said to be the biggest in the Nigeria). The buildup of activities in the Broadband internet segment is another interesting development. New entrants have come in to challenge the grip of the major telecos (MTN, Globacom, ETISALAT, AIRTEL). These companies are faced with the challenge of evolving winning strategies. The stakes are high and only the best will win. This contest is not for the faint hearted and losing is not just an option. The market leaders are doing all they can to strengthen and better their positions. The pressures from new entrants and challengers makes it even more difficult and this is not a zero sum game. There are no promises. Multichoice Nigeria Limited (DSTV) (another South African company providing digital entertainment services) learnt the hard way when it lost the Premier League license to an earlier startup (HITV). The impact of that loss meant immense pressures on the cash flow and profitability of DSTV who for years had been unchallenged. In a dramatic turn, it (DSTV) moved to create a new venture (GoTV) to quell the rising tide of competition. This uncharacteristic move represents one of the many strategic choices for businesses. In this case, by creating GoTV; a low cost alternative to its premium service (DSTV), Multichoice had expanded its where to play choice. According to Monitor Deloitte, there are five of such cascading choices in strategy. These choices are mutually reinforcing and are integrated. They are:

 

1. What does success mean to your business?
2. Where will you play as a business?
3. How will you win?
4. What capabilities do you require to succeed?
5. What initiative and management information systems do you need to establish?

 

The second and third questions forms what is referred to as the heart of strategy.

 

 

 

The replica economy.

Traditional strategy come in two forms. It’s either you are a low-cost competitor or you are a differentiator. As over simplistic as this may sound, the acid test ration for defining the logic, virility and coherence of any strategy choice is to be able to ascertain this position. It is through these lens that any business leader or executive can be sure to know where he is. It is also expedient to state that this is not a YES or NO answer. It is possible to have a hybrid strategy where bits and pieces of cost leadership are mixed with Differentiation. However, the law of position says that "You can't be all things to all men." Apple is a premium brand. Southwest Airlines is a low-cost brand. The two companies are undisputed  leaders in their chosen markets.

 

 

 

So what is the Replica economy and what has it got to do with anything?

 

 

 

The epiphany for this began as a random observation really. I walked into a retail supermarket to pick a few items including a body spray. My eyes was drawn to a section of the shelf containing a lineup of a collection. I moved closer and what I saw opened a deluge of curiosity and a fountain of questions. There I was standing face-to-face with what looked too good to be true. How on earth did Issey Miyake come up with a low priced body spray? I decided to buy this seemingly "fake" product and alas, I was rocked to my core. The scent was identical with the "original" Issey Miyake. Could this be a new line of product? But what would make a premium perfume brand create a low cost body spray? More disturbing was the fact that the package came with the unique Issey Miyake design language and color. It wasn't a shy imitation. I have seen Louis Vuitton spelt as Luis Vitton before. Once in a lifetime, everyone would come in contact with knockoffs and copy-cat products. For the life of me, this was not the case.

 

 

 

Months after, I had another surreal encounter. This time around, I was left with even more confusion and amusement. I saw a 100ml of Issey Miyake signature scent (the one with the kwirky bottle) priced for N1000 (less than $10). The average price of a 50ml Issey Miyake perfume (for men) goes for nothing less than $40. This time, I called the attention of the shop attendant to make sure I wasn't hallucinating. I was assured, they hadn't made a mistake at all. Again, I decided to try it out. Boy was I dazed! I couldn't even differentiate from the "original". The feedback from colleagues was awesome. My only regret was that I didn't buy the entire stock when I had the chance to. The next time I went to the shop to buy, I didn't find my Issey Miyake. This time around though, other brands had joined. Givenchy, Armani, Chanel, Hugo Boss, Perry Ellis, e.t.c.

 

 

 

In the period since my first encounter, I have watched with keen eyes the systematic growth in the number of brands that now exist in the SMART COLLECTION row of perfumes and body spray (For men and women). It’s proven difficult to establish the validity of this product line (My native mind consider the possibility of a massive infringement here). Attempts to investigate SMART COLLECTION has been abortive. The questions lingers on.

 

1. What type of business model is this?
2. What is the business case for it?

 

 

Let us imagine that SMART COLLECTION is not a scam. Let us for a moment assume that this is not different from what happens in the Nigerian music industry. Nosa is an artist under the auspices of Chocolate City; a hugely popular record label here in Nigeria. He recently released his maiden album via iTunes. Weeks after, the album was available on the street for N150. The album goes for more than that price on iTunes and it has more tracks listed. And, the album being peddled by the street hawkers is not illegal. Nosa and his record label allowed it. It is a deliberate distribution strategy. It is obvious why this is the case. A typical Nigerian (those in the larger income demography) will not buy an album on iTunes. His archetype doesn't just fit the existing channel. For Nosa to win, he had to create a less premium product that is affordable and easily accessible by his target market. This doesn't diminish the premiumness of Nosa. He is a super talented musician and a differentiated brand for that matter. His key differentiation is his style and his lyrics. All of these didn't stop him and his management from tapping into the opportunity. Similar strategies has been used by other premium brands in the Nigerian music industry. When Procter and Gamble (P&G) via its men's grooming brand (Gillette) chose to play in the Indian market, it went through a product development guided by design thinking to create a razor for men that fit the unique buying state of the Indian man. Of course, the price point was reflective of the income attribute of that market which incidentally is an emerging market.

 

 

 

The Smart Collection example, the Nigerian music industry illustration and the strategy that was adopted by Gillette point to one and the same thing. It is a trend that is here to stay. When next you come across a product that bears semblance with a premium brand, don't be quick to judge it as fake. The lines are blurring. Welcome to the replica economy.

 

 

 

Image Credit: Google.