Sunday 9 January 2011

Next generation entrepreneurs: coupling the growth of emerging markets with business ideas from the West

How do you become a successful entrepreneur? Amongst the many answers to this question, one thing that undoubtedly helps is starting your business in a growing market. Nearly all of the biggest entrepreneurial success stories involve rapidly growing markets: think of Microsoft (founded 1975) and Apple (1976) growing in the 1980s Computing boom; Amazon (1994) and EBay (1995) in the 1990s eCommerce boom, and Skype (2003) and Facebook (2004) in the 2000s Social Networking boom. Success in tackling mature industries is much rarer, though not impossible as proved by Sir Richard Branson, whose Virgin group has had major successes in both the Retail and Airline industries.

Many growth markets (those growing over 20% p.a.) in the Western world are the result of technological innovation. Except when a new technology triggers a wave of entrepreneurial activity, most business in the West is done by old and well-established firms (which typically grow less than 10% p.a.). The business hierarchy and supply chain structure is well understood; most corporate strategies are honed and fairly constant, and winners and losers emerge over decades. As a result, success as an entrepreneur is, for the most part, limited to the tech-savvy.

In comparison, in emerging markets the economic order is in a state of flux. A whole host of industries which are mature in the West are still in the process of being formed. In many cases, there are no ‘old and well-established firms,’ with new entrants appearing regularly. The winners and losers in these markets are far from clear.

One particular opportunity is to introduce business ideas that have proved successful in the West but do not exist in the emerging market you are targeting. For example, the most popular search engine in China is Baidu, a company often seen as an imitating Google’s successful search functionality. Last year the FT published an article about a group of entrepreneurs in Shanghai setting up a bar with the ‘Cheers’ theme, taken from Western popular culture. To me these are both effective examples of ‘Cross Cultural Arbitrage,’ where the value-add is in transferring a business model from one locality to another. It doesn’t involve doing anything ground-breaking, but it can lead to strong success. It requires a familiarity with several cultures, which a growing proportion of young people are developing through an education that spans two or three continents. I expect to see a great deal more of these kinds of business success stories, a positive impact of ever-increasing globalization.

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