JOHANNESBURG – Discovery Health and Woolworths have been included in a list of 50 emerging market companies that are mainly focused on their home market, but have been very successful.
The list, compiled by The Boston Consulting Group (BCG) for its 2014 BCG Local Dynamos report, includes 27 companies from Bric (Brazil, Russia, India and China) countries while the rest are from other emerging markets. Six businesses are from Africa.
Mia von Koschitzky Kimani, project leader in BCG’s Johannesburg office, explains that the list is representative but not exhaustive.
“Local dynamos” are emerging market firms that have succeeded by staying home and beating both multinationals and local, often state-owned companies. While the companies don’t necessarily operate exclusively in their home market, they have used it as the growth engine for their business.
Von Koschitzky Kimani says Discovery Health has proved itself with a very innovative business model, especially the Vitality program. The program attracts members with a particular profile depending on the offering, which may include a discounted gym membership or subsidised groceries. The model is now being replicated in a number of countries around the world. Some business schools have even taken it up as a case study for their students.
She says while other international health insurers may have employed a similar strategy, it hasn’t been done in such a comprehensive manner. A health insurer might offer a client a subsidy for a gym membership but it wouldn’t track exactly when the client goes to gym, which is what Discovery does. It ends up having a very comprehensive profile of its customers.
“And that helps them to drive the right behaviour but also attract the right member in the first place.”
Woolworths on the other hand has engrained sustainability principles across their business. This is quite unique in the retail industry in South Africa but also across the world, Von Koschitzky Kimani says.
Although Woolworths may be somewhat smaller than other retailers, it has a very clear business model and focus area, she says.
The aim of the research was to gain insight into the key success factors that have helped successful homegrown companies get a competitive advantage.
Companies from China, India, South East Asia, Turkey, the Middle East, Russia, Africa and Latin America were included.
To shortlist the companies two broad groups of criteria were used. Companies had to be mainly domestically focused with a strong market position, without any government ownership and privileged access to market or resources. The companies also had to be regarded as outstanding successes by local analysts and industry peers.
Qualitative as well as quantitative measures were used to compile the final list of 50. This included analysing the business model, stock market performance (if companies were listed), revenue growth and profitability, amongst others.
Interestingly 42% of the local dynamos operated in the financial services and consumer goods industries, sectors that were traditionally dominated by multinational corporations. However, local dynamos are increasingly becoming successful in these sectors in markets where they are close to the customers and understand their needs, Von Koschitzky Kimani says.
The compound annual growth rate (CAGR) of local dynamos has also outpaced those of other key indices (see graph below) in recent years.
But what makes these companies successful?
Von Koschitzky Kimani says local dynamos have adapted very specific business models that are well suited to serve their local markets.
These companies cater specifically for local customers and conditions. This is often something multinational corporations find challenging as they come with a lot of history and knowledge of how to operate in other markets and may struggle to adjust.
Von Koschitzky Kimani says a very interesting trend is that many local dynamos leverage off digital technologies and are often very agile and quick to adapt. Home Inn, a Chinese company included in the list, saw an opportunity in the underserved and fragmented budget hotel market in China and grew fourfold in five years using a combination of acquisitions and franchising.
These companies have also adapted to uncertainty and circumstances in their particular markets, she says.
Finally, local dynamos are increasingly attracting top talent from across the world and establishing functional excellence – being really good in specific areas of business for example customer service.
While investors would have done quite well by investing in these companies over the last few years, the future of these emerging market businesses will be strongly dependent on the volatility of their local market. Investors might not get a positive return in the short term.
However, they are “quite confident” about the prospects of local dynamos in the long run, Von Koschitzky Kimani says.