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Free-Expanding Markets—a New Way to Look at the Global Markets

Where will we find growth opportunities, the kind that will take businesses and investment portfolios to the next level? The terms we use when looking at current markets and potential ones, “developed markets” and “emerging economies” are popular – but we find those terms limiting, perhaps even deficient. Is a term really that important, you ask? We think it’s vital. Here’s why. The terms themselves focus only on markets at the country level. But what if you’ve got a rapidly growing market opportunity that exists on a supranational, national, regional, industry, cluster or even firm level (phew!)?

Well, we did something that academics tend to do, and we came up with a new term.

“Fast-Expanding Markets” (FEM) are not restricted to traditionally defined boundaries, such as geographical, industrial or firm boundaries. It is possible to argue that the term is too broad to pinpoint real economic drivers and determinants of growth, but it is also this unique characteristic that allows managers and policy makers to find new sources of wealth and prosperity. Thinking along the lines of FEM frees our minds to wave off the restrictions and boundaries of geographies or industries, in order to find new ways of achieving economic growth.

But, first, let’s go back in time. From the end of the dot-com crash in 2001 to the beginning of the financial crisis in the first decade of this century, markets blossomed and new business opportunities emerged around the world. We felt enveloped by a feeling of prosperity, which led to overspending and over-consumption – which in turn fueled more new business opportunities than ever before. The fires of commerce raged on.

We (the general public and businesses) found it easy to part with our money, and just as easy to borrow the money that we didn’t have. Over-extension was the name of the game. It was a tremendously prosperous period for companies and businesses. It was also a grand house of cards.

And now, just a few short years later, the “golden decade” has already been consigned to history. Given the financial meltdown and the subsequent economic crisis, we now live in a world in which people have no choice but to start (belatedly) exercising financial discipline. Additionally, many companies and businesses have shifted their focus away from profitability to simply ensuring their economic survival, primarily by cutting costs. But are these the best tactics for businesses to take in order for us to experience a healthy economic turnaround?

In a word: no. We believe it is far more important for firms to concentrate on top-line growth rather than on lowering costs. While cost cutting can lead to an immediate increase in profit, an expansion of the sources of revenue will lead to far more sustainable advantages in the future. A company cannot cost-cut its way to prosperity. New markets must be found.

While the current economic outlook remains bleak, we do not believe that the situation is all “doom and gloom.” We understand why some companies have adopted a policy of retrenchment in response to a real economic recession. In difficult times, firms usually tend to favor business processes focused on “re-engineering,” “streamlining,” “re-structuring,” re-organizing,” “downsizing,” and “outsourcing” in order to maintain profitability. They are also easier to pursue than revenue growth, which requires growing existing markets or discovering new ones. But cutting and simultaneously growing are not easy feats.

And one more thing: we’re steadfast in our view that retrenchment is a short-term solution that temporarily boosts earnings. It produces few benefits in the long run because it relies on a strict accountancy perspective: costs can only be slashed to a certain point without causing unintended consequences.

For example, in order to cut costs, many companies have moved production to countries with less-expensive labor. However, this does not necessarily lower costs. Lower labor efficiency alone might cancel out anticipated savings. Similarly, reducing costs for parts can have counter-productive effects: cheap parts usually result in an increase in costs associated with quality, service, operations and overhead. And in economically difficult times customer retention becomes even more important. Our bottom line: it is far more paramount for businesses to concentrate on top-line growth than on lowering costs.

We know that new ways of lifting sales in tough times have been widely discussed in the past, but we think the answer lies in looking at markets in a different way. To identify potential opportunities for top line revenue we need to look at “Fast-Expanding Markets” (FEM). Because they are everywhere: at times, they grow intuitively, while at other times they grow counter-intuitively. Traditional market and economic theories often just don’t apply.

Why haven’t we looked at potential markets this way before? We believe that a combination of limitations, inherent in the existing terminologies and the prevalent conservative views on growth, play important roles. Thus far, people have associated such expressions as “emerging markets,” “emerging economies,” “frontier markets,” and “developing markets/economies” with growth opportunities. In our view, such concepts suffer from various shortcomings when describing new growth opportunities.

In our next post we will go intro greater depth on those shortcomings, why it’s time to retire old terminology, and provide an example of what a FEM looks likes.

References:

1Everest Capital (2009) “The End of Emerging Markets,” November, http://evcapan.com/documents/TheEndofEmergingMarkets.pdf, accessed on 7 November 2011.

Terence Tse is a professor of managerial economics at Hult International Business School and Hult Labs Fellow.

Mark Esposito is a professor of global economics and corporate social responsibility at Hult International Business School and a Hult Labs Fellow.

Photo courtesy of Hadar.

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