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					                                                 Competing with
                                                                                                     S
                                                           Survival Strategies’for
                                                            Local Companies in
                                                             Emerging Markets
                                                                     by Niraj Dawar and Tony Frost
                                                                                               .


                                                 In battles
                                                for emerging
                                                   markets, big
                                                   multinationals
                                                       don’t hold all
                                                        the advantages.




~
       PROTECTIONIST BARRIERS CRUMBLE IN         a death sentence. Accustomed to dominant
      emerging markets around the world, multi-  positions in protected markets, they suddenly
) national companies are rushing in to find new  face foreign rivals wielding a daunting array
~opportunities for growth. Their arrival is a    ___ ______ _____ ~ _____ _____~ ~-
  b&n to local consumers, who benefit from the ~ Niraj Dawar is an assistant professor of marketing, and          ’
                                                 Tony Frostis an assistant professor of international busi-
  wider choices now available. For local compa-  ness, at the Richard Ivey School of Business at the Uni-
  nies, however, the influx often appears to be  versity of Western Ontario in London, Ontario, Canada.           ,

    ARTWORK BY DAVID JOHNSON                                                                          1   1   9
COMPETING WITH GIANTS


of advantages: substantial financial resources, ad-  selling motorcycles in Western markets and in such
vanced technology, superior products, powerful       nearby countries as Thailand and Malaysia was
brands, and seasoned marketing and management        well known. For the independent-minded Bajaj
skills. Often, the very survival of local companies  family, a joint venture with Honda was not an op-
in emerging markets is at stake.                     tion. But faced with Honda’s superior resources,
   Strategists at multinational corporations can     what else could the company do?
draw on a rich body of work to advise them on how       A closer look at the situation convinced Bajaj’s
to enter emerging markets, but managers of local j managers that Honda’s advantages were not as for-
companies in these markets have had little guid- ( midable as they first appeared. The scooter industry
                                                                  was based on mature and relatively sta-
                                                                  ble technology. While Honda would en-
Despite ihe heated rhetoric surrounding                           joy some advantages in product develop-
                                                                  ment, Bajaj would not have to spend
globalization, industries actually vary a                         heavily to keep up. The makeup of the
                                                                  Indian scooter market, moreover, dif-
great deal in the pressures they put on                           fered in many ways from Honda’s es-
                                                                                 .    .
companies to sell internationally                                 tablished customer base. Consumers
                                                                  looked for low-cost, durable machines,
                                                                  and they wanted easy access to mainte-
ante. How can they overcome-and even take ad-        nance facilities in the countryside. Bajaj, which
vantage of-their differences with competitors        sold cheap, rugged scooters through an extensive
from advanced industrial countries? Many of these    distribution system and a ubiquitous service net-
managers assume they can respond in one of only      work of roadside-mechanic stalls, fit the Indian
three ways: by calling on the government to rein-    market well. Honda, which offered sleekly designed
state trade barriers or provide some other form of   models sold mostly through outlets in major cities,
support, by becoming a subordinate partner to a      did not.
multinational, or by simply selling out and leaving     Instead of forming a partnership with Honda,
the industry. We believe there are other options for Bajaj’s owners decided to stay independent and for-
companies facing stiff foreign competition.          tify their existing competitive assets. The company
   In markets from Latin America to Eastern Europe   beefed up its distribution and invested more in re-
to Asia, we have studied the strategies and tactics  search and development. Its strategy has paid off
that successful companies have adopted in their      well. Honda, allied with another local producer, did
battles with powerful multinational competitors.     quickly grab I I % of the Indian scooter market, but
Vist in Russia and Shanghai Jahwa in China, for ex-  its share stabilized at just under that level. Bajaj’s
ample, have managed to successfully defend their     share, meanwhile, slipped only a few points from
home turfs against such multinationals as Compaq     its earlier mark of 77%. And in the fall of 1998,
and Unilever. Others, including Jollibee Foods in    Honda announced it was pulling out of its scooter-
the Philippines and Cemex in Mexico, have built      manufacturing equity joint venture in India.
on strength at home and launched international ex-      Bajaj’s story points to the two key questions that
pansion strategies of their own. By studying these   every manager in emerging markets needs to ad-
examples, managers of other companies from           dress: First, how strong are the pressures to global-
emerging markets can gain insight into their own     ize in your industry? Second, how internationally
strategic options.                                   transferable are your company’s competitive assets?
                                                     By understanding the basis for competitive advan-
Aligning Assets                                      tage in your industry, you can better appreciate the
                                                     actual strengths of your multinational rivals. And
with Industry Characteristics                        by assessing where your own competitive assets are
When India opened its automotive sector in the       most effective, you can gain insights into the breadth
mid-1980s, the country’s largest maker of motor      of business opportunities available to you. Let’s
scooters, Bajaj Auto, confronted a predicament sim-  take each question in turn.
ilar to what many “emerging-market” companies           Despite the heated rhetoric surrounding global-
face. Honda, which sold its scooters, motorcycles,   ization, industries actually vary a great deal in the
and cars worldwide on the strength of its superior   pressures they put on companies to sell interna-
technology, quality, and brand appeal, was planning  tionally. At one end of the spectrum are companies
to enter the Indian market. Its remarkable success   in such industries as aircraft engines, memory

120                                                              HARVARD   BUSINESS   REVIEW   March-April   1999
                                                                                 COMPETING      WITH   GIANTS


chips, and telecommunications switches, which             example, to undercut the price of goods sold in
face enormous fixed costs for product development,        other countries. Or a company may use its exper-
capital equipment, marketing, and distribution.           tise in building efficient factories to establish oper-
Covering those costs is possible only through sales       ations elsewhere. Assets that may seem quite local-
in multiple markets. A single set of rules governs        ized, such as experience in serving idiosyncratic
competition worldwide, and consumers are satis-           or hard-to-reach market segments, may actually
fied with the standardized products and marketing         travel well. By paying close attention to countries
appeals that result.                                      where market conditions are similar to theirs, man-
   At the other end of the spectrum are industries in     agers may discover that they have more transfer-
which success turns on meeting the particular de-         able assets than they realize. The more they have,
mands of local consumers. In beer and retail bank-        the greater their chance of success outside the
ing, for example, companies compete on the basis          home base.
of well-established relationships with their cus-            These two parameters-the strength of global-
tomers. Consumer preferences vary enormously              ization pressures in an industry and the degree to
because of differing tastes, perhaps, or incompatible     which a company’s assets are transferable inter-
technical standards. Multinationals can’t compete         nationally - can guide strategic thinking. If global-
simply by selling standardized products at lower          ization pressures are weak, and a company’s own
cost. Alternatively, high transportation costs in         assets are not transferable, then, like Bajaj, the com-
some sectors may discourage a global presence. In         pany needs to concentrate on defending its turf
all of these industries, companies can still prosper      against multinational incursion. We call a company
by selling only in their local markets.                   employing such a strategy a defender. If globaliza-
   Most industries, of course, lie somewhere in the       tion pressures are weak but the company’s assets
middle of the spectrum. International sales bring         can be transferred, then the company may be able to
some advantages of scale, but adapting to local pref-     extend its success at home to a limited number of
erences is also important. By thinking about where        other markets. That sort of company is an extender.
their industry falls on the spectrum, managers from          If globalization pressures are strong, the company
emerging markets can begin to get a picture of the        will face bigger challenges. If its assets work only at
strengths and weaknesses of their multinational           home, then its continued independence will hang
competitors. But they need to place their industry        on its ability to dodge its new rivals by restructur-
carefully. As Bajaj found, industries
that seem similar may be far apart on
the spectrum-pressures to globalize                           Two parameters - the strength of 1
scooters turn out to be much weaker
than those to globalize automobiles.               globalization pressures in an industry and I
Bajaj may go global in the future, as the     -
Indian market evolves, but it has no                  the company’s transferable assets - can
need to do so now.                                   guide that company’s strategic thinking.
   Once they understand their indus-
try, managers need to evaluate their
company’s competitive assets. Like Bajaj, most            ing around specific links in the value chain where
emerging-market companies have assets that give           its local assets are still valuable. Such a company,
them a competitive advantage mainly in their              in our terminology, is a dodger. If its assets are
home market. They may, for example, have a local          transferable, though, the company may actually be
distribution network that would take years for a          able to compete head-on with the multinationals at
multinational to replicate. They may have long-           the global level. We call a company in that situation
standing relationships with government officials          a contender.
 that are simply unavailable to foreign companies.           We can plot these four strategies on a matrix. (See
 Or they may have distinctive products that appeal        the exhibit “Positioning for Emerging-Market
to local tastes, which global companies may be            Companies.“) As with any strategic framework, our
 unable to produce cost effectively. Any such asset       matrix is not intended to prescribe a course of ac-
 could form the basis for a successful defense of the     tion but to help managers think about the broad
home market.                                              options available.
    Some competitive assets may also be the basis for        To gain a clearer view of all four options, let’s
 expansion into other markets. A company can use          look at how companies have used them to succeed
 its access to low-cost raw materials at home, for        in a newly competitive environment. We’ll start

HARVARD   BUSINESS   REVIEW   March-April   1999                                                            121
with industries where the globalization pressures     currently fascinated by all things Western. Instead
are weak, then move to industries where those         of trying to fight for this segment, Jahwa concen-
pressures are strong.                                 trates on the large group of consumers who remain
                                                      loyal to traditional products. The company has de-
Defending with                                        veloped low-cost, mass-market brands positioned
                                                      around beliefs about traditional ingredients.
the Home Field Advantage                                 Many Chinese consumers, for instance, believe
For defenders like Bajaj, the key to success is to    that human organs such as the heart and liver are
concentrate on the advantages they enjoy in their     internal spirits that determine the health of the
home market. In the face of aggressive and well-      body. Liushen, or “six spirits,” is the name of a tra-
endowed foreign competitors, they frequently need , ditional remedy for prickly heat and other summer
to fine-tune their products and services to the par-  ailments, and it’s made from a combination of pearl
titular and often unique needs of their customers.    powder and musk. Drawing on this custom, Jahwa
Defenders need to resist the temptation to try to     launched a Liushen brand of eau de toilette and
reach all customers or to imitate the multinationals. packaged it for summer use. The brand rapidly
They’ll do better by focusing on consumers who ap-    gained 60% of the market and has since been ex-
preciate the local touch and ignoring those who       tended to a shower cream also targeted at the
favor global brands.                                  liushen user. Unilever and other multinational
   Shanghai Jahwa, China’s oldest cosmetics com-      companies lack this familiarity with local tastes;
pany, has thrived by astutely exploiting its local    they have found their products appeal mainly to
orientation- especially its familiarity with the dis- fashion-conscious city dwellers.
tinct tastes of Chinese consumers. Because stan-         For those product lines that don’t have such an in-
dards of beauty vary so much across cultures, the , trinsic appeal to consumers, Jahwa has found that it
pressure to globalize the cosmetics industry is       can compete on price. Here Jahwa has taken advan-
weak. Nevertheless, as in other such industries,      tage of the constraints that multinational compa-
a sizable market segment is attracted to global       nies face in adapting Western-designed products to
brands. Young people in China, for example, are       developing countries. Multinationals typically op-

122                                                               HARVARD BUSINESS REVIEW March-April 1 9 9 9
                                                                                     COMPETING       WITH    GIANTS


 timize their operations on a global level by stan-
    dardizing product characteristics, administrative
 1practices, and even pricing, all of which can hamper
 their flexibility. Products designed for affluent con-
    sumers often aren’t profitable at prices low enough
    to attract many buyers in emerging markets. And
    even if they are, a multinational might damage its
 1 global brand by selling its products cheaply.                Multinational enterprises bring enormous advan-
      As a result, a number of Jahwa’s foreign rivals           tages when they enter emerging markets, but they
   have been stuck in gilded cages at the top of the i          are also subject to important constraints. In the
                                                                early 199os, managers of Johnson & Johnson in
   market, giving Jahwa an advantage in reaching con-
                                                                the Philippines were looking for new products to
   sumers with little discretionary income. Revlon,             boost local sales. They discovered that young Fil-
   for example, estimates its target market in China            ipino women were using one of their most suc-
 , to be just 3 % of the country, or 39 million people,         cessful products-Johnson & Johnson baby talcum
   whereas Jahwa aims at over half the market. (See             powder-to freshen their makeup. These users
   the insert “The Importance of Staying Flexible.“)            typically carried a small amount of the powder in
      Jahwa has also benefited from the sheer visibility        a knotted handkerchief to use outside the home.
   of the multinationals’ strategies. Product formula-          To target this latent market, Johnson & Johnson
   tions, brand positioning, and pricing are often well         Philippines developed a compact holder for the
known long before a multinational launches its                  talcum powder, complete with mirror and powder
   brands in a foreign market. This transparency af-            puff. An advertising campaign was targeted at this
                                                                segment, and distribution was secured through
   fords defenders both the knowledge and the time
                                                                supermarkets and corner shops.
   to preempt a new brand with rival offerings of                  A few days before the product’s launch, however,
   their own. Jahwa quickly launched its G.LF line              corporate headquarters in the United States asked
   of colognes, for example, to protect itself from the         that it be canceled. The reason: “We are not in the
   entry of a global brand targeted at the upscale ur-          cosmetics business.” Local managers were stunned.
   ban male segment, which Jahwa had ignored.                   They argued that the compact would be a test of
      Jahwa’s strategy has allowed it to weather the ini-       their ability to develop products for the local mar-
tial opening of China’s markets -a period when                  ket. Only after the chief marketer in the Philip-
   multinational companies often appear irresistible            pines flew to headquarters and made a personal
   to consumers and local competitors alike. At first,          plea for the product did the company allow the
   consumers often flock to foreign brands out of curi-         launch to go ahead.
                                                                   The product was a great success; sales exceeded
   osity or out of a blind belief in their virtues. Procter &
                                                                projections by more than a factor of ten. Neverthe-
   Gamble, for example, grabbed over half the Chinese           less, Johnson & Johnson has not introduced the
   market for shampoo in just a few years, despite the          product in other markets. And even in the Philip-
; substantially higher price of its product. But by fo-         pines, the company has subsumed the product
   cusing on offerings that reflect local preferences,          into a broad line of toiletries instead of promot-
   Jahwa was able to protect some sales and buy time            ing it separately. Johnson & Johnson preferred to
   in which to build up the quality of its products and         give up sales rather than run the risk of being seen
   marketing. Jahwa’s managers have good reason to              as a cosmetics producer in the company’s more-
   believe that many consumers will eventually shake            established     markets.
   off their expensive infatuation with foreign brands             Companies based in emerging markets don’t
   and go back to Jahwa and other local lines.                  have to contend with such constraints arising
                                                                from established positions in affluent markets.
      Other defenders have been able to blunt the force
                                                                Not only are they closer to their own market, but
   of foreign competition by beefing up their distribu-         they are also free to let the market define them.
tion network. Grupo Industrial Bimbo, the largest               This flexibility is one of a number of advantages
producer of bread and confectionery products in                 that local managers may overlook when they face
   Mexico, seized on that asset when faced with for-            the prospect of multinationals entering their own
   eign competition. Over the years, Bimbo had built            market.
   up an extensive sales and distribution force to get             For more on the constraints confronting multi-
   its products into tiendas, the ubiquitous corner             national companies, see C. K. Prahalad and Kenneth
   stores where Mexicans still do most of their shop-           Lieberthal, “The End of Corporate Imperialism,”
   ping. The company employs 14,000 drivers who                 HBR July-August 1998.
   blanket the country with 420,000 deliveries daily
   to 350,000 clients.

 HARVARD    BUSINESS   REVIEW   March-April   1999                                                                 123
COMPETING      WITH    GIANTS


  At the time that Mexico was opening its markets,        and delivery standards but also by developing ri-
Bimbo’s managers were considering a lower-cost            val menus customized to local tastes. Along with
approach that would have cut out a number of these        noodle and rice meals made with fish, Jollibee cre-
daily runs to tiendas, many of which brought only         ated a hamburger seasoned with garlic and soy
about $10 in revenue per delivery. When PepsiCo           sauce-allowing it to capture 75 % of the burger
aggressively entered the Mexican bakery market in         market and 5 6% of the fast-food business in the
1991, however, those plans were quickly shelved.          Philippines. Having learned what it takes to com-
The move shocked Bimbo’s managers into examin-            pete with multinationals, Jollibee had the confi-
                                                                 dence to go elsewhere. Using its battle-tested
                                                                 recipes, the company has now established
Far from weighing down operations                                dozens of restaurants near large expatriate
                                                                 populations in Hong Kong, the Middle East,
with low-margin sales, the company’s                             and California.
                                                                    Similarly, managers can look for countries
distribution network was the key to                              with a common cultural or linguistic her-
defending its home turf.                                         itage. Televisa, Mexico’s largest media com-
                                                                 pany, used that approach to become the
                                                                 world’s most prolific producer of Spanish-
ing their actual sources of competitive advantage.        language soap operas. Recognizing that its pro-
Far from weighing down operations with low-mar-           grams would have considerable value in the many
gin sales, Bimbo’s distribution network was the key       Spanish-speaking markets outside Mexico, the
to defending its home turf. The network tapped            company targeted export markets in Latin Amer-
into Mexican consumers’ preference for freshness          ica, Spain, the U.S. border states, and Florida. Re-
and their habit of shopping daily at a nearby store,      cently, Televisa has begun its own news broadcasts,
creating a huge barrier to entry for foreign competi-     teaming up with Rupert Murdoch’s News Corpora-
tors. Instead of reducing deliveries, Bimbo’s man-        tion for distribution to Spanish-language markets
agers increased them-although they did lower              worldwide.
costs by sending to the smaller tiendas trucks with          The concept of analogous markets can be stretched
multiple products instead of the single-product de-       far indeed. India’s Asian Paints controls 40% of the
liveries sent everywhere else. Their defensive strat-     market for house paints in its home base, despite
egy paid off: Bimbo has maintained leading posi-          aggressive moves by such major multinationals as
tions in each of its major market segments.               ICI, Kansai Paints, and Sherwin Williams. The
                                                          company has thrived against foreign competitors
                                                          by developing its local assets, notably an extensive
Extending Local Advantages Abroad                         distribution network. Its paint formulations and
In some cases, companies in local industries can go       packaging practices make for an extremely low-
beyond defending their existing markets. With the         cost product -one that, its managers have discov-
right transferable assets, these extenders can use        ered, holds considerable appeal in other developing
their success at home as a platform for expansion         countries. After its success exporting to neighbors
elsewhere. A selective policy of international ex-        such as Nepal and Fiji, the company is now pursu-
pansion, carefully tied to the company’s key assets,      ing joint ventures abroad.
can reap added revenue and scale economies, not to           Asian Paints brings substantial advantages to
mention valuable learning experiences.                    these countries. Its managers are used to dealing
   Extenders can leverage their assets most effec-        with the kind of marketing environment there-
tively by seeking analogous markets -those similar        thousands of scattered retailers, illiterate consum-
to their home base in terms of consumer prefer-           ers, and customers who want only small quantities
ences, geographic proximity, distribution channels,       of paint that can then be diluted to save money.
or government regulations. Expatriate communi-            Multinational rivals, by contrast, have built their
ties, to take a simple case, are likely to be receptive   operations around the demands of affluent cus-
to products developed at home.                            tomers looking for a wide choice of colors and fin-
   Jollibee Foods, a family-owned fast-food com-          ishes. Their expatriate managers are used to air-
pany in the Philippines, has extended its reach by        conditioned offices and bottled water that costs
focusing on Filipinos in other countries. The com-        more per liter than most customers are willing to
pany first overcame an onslaught from McDonald’s          pay for paint. Even after they develop a low-end
in its home market, partly by upgrading service           paint product, the multinationals will still have a

124                                                                 HARVARD   BUSINESS   REVIEW   March-April   1999
                                                                              COMPETING      WITH    GIANTS


long way to go to catch up in emerging markets.         the interior of the country through an extended
Asian Paints already knows how to speak the lan-        dealer network and developed exclusive distribu-
guage of these customers.                               tion agreements with several key retailers. It also
                                                        established its own full-service centers in dozens
                                                        of Russian cities.
Dodging the Onslaught                                      That approach was well suited to the Russian
In industries where pressures to globalize are          computer market, which is still in its early stages.
strong, managers will not be able to simply build on    Russians need much more information and reassur-
their company’s local assets-they’ll have to re-        ance than most Western buyers before they will
think their business model. If their assets are valu-   purchase a computer, and they appreciate a local
able only in their home country, then the best          presence. All of Vist’s manuals are in Russian, and
course may be to enter into a joint venture with, or    the company provides lengthy warranties, unlike
sell out entirely to, a multinational. The Czech car-   rivals, which simply sell extended service con-
maker Skoda took that latter step after the collapse    tracts. The computers that Vist sells- the product
of the Soviet Union in 1989. Like many companies        of a low-cost assembly operation using mostly im-
in communist countries, Skoda’s position as an of-      ported components-are unremarkable; neverthe-
ficial producer under the old Soviet regime had al-     less its downstream assets have made Vist the lead-
lowed the company simultaneously to survive and         ing brand in Russia with 20% of the market. And as
to stagnate. Only the choice-starved consumers in       the Russian computer market advances, Vist’s net-
the former Eastern bloc could appreciate Skoda’s        work of service centers will alert the company to
cars, and even they recognized how outdated the         changes before its rivals see them.
designs were, how poor the quality was, and how            Just as defenders focus on market segments re-
limited the appeal of the brand was compared with       sponsive to their local strengths, dodgers like Vist
Western makes.                                          move to links in the value chain where their local
   When markets opened in Eastern Europe, Skoda’s       assets still work well. But, as Skoda’s experience
position became untenable. Multinational carmak-        shows, not all companies can make the jump that
ers arrived with the sort of insurmountable advan-      dodgers have to make. Vist was able to restructure
tages made possible by their global scale: superior     around distribution and service because it was al-
models, well-known brands, and financial muscle.        ready active in those areas; Skoda had little room to
The Czech government soon sold the company to           maneuver because it was devoted almost entirely
Volkswagen, which subsequently re-
structured Skoda’s operations, invested        TTn
heavily in new products and technology,       w nere globalization pressures are strong,
and positioned it as the value brand in
Volkswagen’s global line of vehicles.               managers can’t just build on their
   In many cases, however, there are al-
ternatives to selling out. Consider the         company’s local assets; they will have
Russian personal-computer maker Vist.                to rethink their business models.
When Russia liberalized its economy,
Vist’s managers knew they would win
few battles going head to head with the likes of        to one part of the value chain. Skoda also had enor-
Compaq, IBM, and Hewlett-Packard. Rather than           mous investments in capital-intensive manufac-
sell out or seek a joint venture, however, they side-   turing (not to mention a large number of jobs) that
stepped oblivion by redefining their core business.     the Czech government was understandably reluc-
They dodged the global threat by focusing on links      tant to drop in order to refocus on other parts of the
in the value chain where Vist’s assets provided         business.
competitive advantage. Instead of viewing the com-         While distribution and service are common re-
pany as a manufacturer of personal computers, they      courses for dodgers, there are others. One approach
increasingly emphasized the downstream aspects          is to supply products that either complement
of Vist’s existing business-distribution, service,      multinationals’ offerings or adapt them to local
and warranties.                                         tastes. When Microsoft moved into China, for ex-
   While its multinational rivals concentrated on       ample, local software companies shifted their focus
selling machines to government and corporate            from developing Windows look-alike operating sys-
markets in Moscow, Vist took advantage of its           tems to developing Windows application programs
familiarity with the wider market. It reached into      tailored to the Chinese market.

HARVARD BUSINESS REVIEW March-April 1999                                                                  125
COMPETING      WITH    GIANTS


    Dodgers can also move to the other end of the         cost advantage they enjoy will often be undermined
value chain. As Mexico has opened its markets,            by deficiencies in other areas. But by moving to-
many manufacturing companies have reoriented              ward the productivity, quality, and service levels of
themselves, becoming local component suppliers to         their competitors from developed countries, local
the newly built factories of foreign multinationals.      contenders in commodity industries can build a
    Dodging may be the most difficult of the four         sustainable basis for long-term competitive success.
strategies to execute because it requires a company          For would-be contenders that lack access to key
to revamp major aspects of its strategy-and to do so      resources, finding a distinct and defensible market
before it’s swept under by the tide of foreign compe-     niche is vital. One increasingly common approach
tition. But by focusing on carefully selected niches,     is to join a production consortium, in which a lead
a dodger can use its local assets to establish a viable   company manages a regional or global web of com-
position.                                                 ponent developers and suppliers. Few emerging-
                                                          market companies have the market presence, coor-
                                                          dination capabilities, or innovative technology
Contending on the Global Level                            they would need to act as the lead organization in
Despite the many advantages of their multinational        a far-flung production network. Most of them will
rivals, companies from emerging markets should            need to concentrate on building scale and exper-
not always rule out a strategy of selling at the global   tise along particular pieces of their industry’s
level. If their assets are transferable, they may be      value chain.
able to become full-fledged multinationals them-             When General Motors decided to outsource the
selves. The number of these contenders is steadily        production of radiator caps for its North American
increasing, and a few, such as Acer of Taiwan and         vehicles, India’s Sundaram Fasteners seized the op-
Samsung of Korea, have become household names.            portunity to go global. Suudaram bought an entire
The reasons for their success are similar to those of     GM production line, moved it to India, and a year
any thriving company that competes in a global in-        later became the sole supplier of radiator caps to
dustry. However, contenders often have to take            GM’s North American division. In addition to the
into consideration a different set of opportunities       obvious benefits to the bottom line that accrue
and constraints.                                          from the guarantee of selling 5 million radiator caps
   Most contenders are in commodity industries            a year, participation in GM’s supply network made
where plentiful natural resources or labor give           it easier for Sundaram to develop its capabilities
them the low-cost advantage. From Indonesia, In-          and learn about emerging technical standards and
dah Kiat Pulp & Paper (IKPP), for example, has ag-        evolving customer needs. Sundaram was one of the
gressively moved into export markets by drawing           first Indian companies to achieve QS 9000 certifi-
on a ready supply of logs- the product of favorable       cation, a quality standard developed by U.S. auto-
tropical growing conditions, low harvesting costs,        makers, which GM requires for all its component
and government-guaranteed timber con-
cessions. In its core paper business, it
enjoys production costs that are nearly          For would-be contenders that lack access
half those of its North American and
Swedish competitors, a huge advantage              to key reso-urces, finding a distinct and
in export markets.                                        defensible market niche is vital.
   IKPP’s cost advantage is not due en-
tirely to geography. The company has
also invested heavily in advanced machinery to            suppliers. The skills learned during the certification
make its production more efficient. This is an im-        process also benefited Sundaram’s core fastener
portant lesson for all companies trying to capitalize     business, putting it in a position to target the Euro-
on lower costs of resources or labor, particularly as     pean and Japanese markets. Unlike local suppliers
multinationals set up their own operations in de-         to multinational companies, Sundaram’s Indian op-
veloping countries. Rather than being content to let      erations are capable of supplying factories all over
resources provide the sole advantage, contenders          the world. (See the insert “How to Stay Independent
need to measure themselves against the practices of       with Partnerships.“)
leading companies in their industry. Many, like              Sundaram was able to transfer the knowledge it
IKPP did, will find their quality or productivity         gained by being part of a production consortium di-
levels lacking. Others will have severe deficiencies      rectly to its core business. But finding a viable niche
in service, delivery, or packaging. As a result, the      in a global industry usually means an extended

126                                                                  HARVARD   BUSINESS   REVIEW   March-April   1999
                                                                                        COMPETING       WITH    GIANTS




  For companies in many emerging markets, giving up               For extenders and contenders, alliances are often
  control is the option of last resort. This is especially     essential. They can range from supply chain partner-
  true for the family-owned businesses that play a lead-       ships, like the one Sundaram Fasteners joined with
’ ing role in most of these economies. But alliances with      General Motors, to distribution arrangements with re-
  multinationals do not always involve a loss of inde-         tailers in other countries. Forming manufacturing
  pendence. When carried out within well-defined para-         partnerships to supply private-label goods may be the
  meters, they can actually help a company preserve its        only way for many companies to crack international
  freedom in the face of competitive threats.                  markets. Before investing in its own brands and be-
     Companies using any of the four strategies to             coming a full-fledged contender, Acer of Taiwan made
  counter the entry of multinationals into their markets       computers for sale under the Compaq brand; similarly,
  can benefit from forming alliances, but the nature and       Kia Motors of Korea manufactured the Ford Fiesta.
  objectives of the alliances will differ depending on            Private-label partnerships can be useful even for
  which strategy they adopt. Alliances can help,defend-        extenders that have no global ambitions. Balsara, an
  ers fortify their positions. Shanghai Jahwa, for exam-       Indian hygiene-products and cosmetics company
  ple, saw that multinational rivals were offering a           best known for its Promise brand of clove toothpaste,
  broader product line than it could. By forming alliances     is facing stiff domestic competition from Colgate-
  with the Japanese companies Kanebo and Lion, Jahwa           Palmolive. Balsara’s managers are committed to de-
  was able to offer to the distribution trade a line of        fending their home market, but Colgate’s strengths
  household and personal care products as broad as those       as an international brand are imposing. By winning
  of the competition. Jahwa was careful, however, to           private-label toothpaste agreements from such non-
  limit the partnership to a small part of its lineup,         rivals as Henkel and the Beecham Group, Balsara was
  which enabled it to maintain financial and managerial        able to strike back at its rival’s turf in the West. But
  control over its products. Dodgers can also benefit by       more important, the partnerships enabled Balsara to
  establishing similar sorts of limited partnerships to fill   upgrade its factories and the quality of its products
  gaps in their capabilities quickly as they move to a dif-    and packaging-improvements that will help the
  ferent part of the value chain and redeflne themselves.      company protect its market share at home.




process of restructuring. Many companies may                   in.g has paid off, especially in the United States,
have to shed businesses that can’t be sustained on             where the company has captured ~5% of the large
the global level. To many managers in emerging                 market for heavy-duty tractor axles. Axles now ac-
markets who are conscious of links between their               count for over two-thirds of Raba’s sales, and nearly
businesses, that process will be difficult. But shed-          all of them are exported.
ding businesses, outsourcing components previ-                    By contrast, the company’s remaining operation
ously made in-house, and investing in new prod-                in the wider engine and vehicle market, where it
ucts and processes are the keys to repositioning               operates only in Eastern Europe, is facing a severe
contenders as focused, global producers. Indeed, the           challenge from such major multinationals as Cum-
need to get smaller before getting larger is one of            mins and DaimlerChrysler. Despite Raba’s exten-
the major themes in the corporate restructuring                sive service network, the globalization pressures in
process under way in Eastern Europe.                           that industry, throughout its value chain, may be
  In Hungary, Raba, for example, used to produce a             too strong to withstand.
diverse line of vehicles and components -from en-                 Perhaps the greatest challenge for contenders is
gines and axles to complete buses, trucks, and trac-           to overcome deficiencies in skills and financial re-
tors. When markets in Eastern Europe opened, the               sources. Especially in high-tech industries, where
company faced a collapse in demand. Yet as the au-             product life cycles are short, contenders are often
tomotive industry rapidly consolidated globally,               put at a disadvantage by their distance from lead-
Raba managed to avoid Skoda’s fate. It focused on              ing-edge suppliers, customers, and competitors.
the worldwide market for heavy-duty axles, a seg-              The cost of capital is also much higher for them
ment in which its technology was fairly close to the           than it is for their multinational rivals, a direct re-
standards of international competitors. Restructur-            sult of the greater political and economic risk in

HARVARD   BUSINESS   REVIEW   March-April 1999                                                                        127
  COMPETING      WITH     GIANTS




                                  A TALE OF TWO STRATEGIES

    It’s not just individual businesses that need to consider       Arvind’s managers focused on denim for the apparel
    how their competitive assets match the globalization        division as well, but they chose a completely different
    pressures of their industry. Many companies from            strategy. Going global in apparel would have been pro-
    emerging markets belong to multibusiness organiza-          hibitively expensive-developing a global consumer
    tions. By mapping their business portfolio on the ma-       brand is beyond the resources of most contenders,
    trix, the heads of diversified companies in emerging        which is why they almost always specialize in pro-
    markets can see potential trouble spots and areas of        ducer goods. Arvind’s managers went on the defensive
    opportunity, and make decisions accordingly.                and emphasized the local aspects of the industry’s
       India’s Arvind Mills is a good example of a company      value chain - tailoring and distribution. They built
    that pursued opposite strategies in adjusting its differ-   capabilities and local brand appeal to sell jeans specif-
    ent businesses to competitive threats. In the 198os,        ically in India. Recognizing that major brands like
    Arvind found itself being squeezed by low-cost foreign      Levi’s would have little choice but to target the top
    integrated mills and nimble domestic power-loom op-         end of the market, Arvind saw huge potential in the
    erators. Stuck in the middle, Arvind’s managers real-       mass-market segment, which would include many
    ized that the company would not be viable if India’s        first-time jeans buyers. The question was how to make
    textile industry became fully liberalized. Central to       the price attractive to those consumers.
    their company’s turnaround was their recognition                Arvind’s radical solution was to launch a brand-
    that, despite similar symptoms, their two main busi-        Ruf & Tuf - sold in kit form. The kit consisted of fab-
    nesses were suffering from different maladies-and re-       ric, a metal zipper and rivets, a leather Ruf & Tuf
    quired different cures.                                     patch, a pattern, and sewing instructions. The com-
       Success in the fabric division increasingly depended     pany launched the concept in conjunction with a ma-
    on economies of scale, and the managers decided that        jor advertising campaign and an education program
    the company could survive only by moving onto the           intended to reach some 6,000 tailors.
    global stage. As contenders, they were careful to con-          Arvind’s insight was to accommodate its product to
    centrate on a niche market that allowed them to catch       local buying practices. It was the custom of people
    up with existing producers quickly. That market was         to purchase fabric and use local tailors to stitch the
    denim, a fabric that at the time accounted for only         final product. The company knew that major multi-
    IO% of Arvind’s output. The denim fabric itself is es-      nationals would be powerless to follow that approach
    sentially a commodity; while fashions in denim do           since local tailoring undermined a key value proposi-
    change, those changes are imposed by the apparel            tion of foreign brands- the consistency of the product.
    makers, not the cloth manufacturers. A few large buy-           At the same time, Arvind could use its marketing
    ers choose from a fragmented base of cloth suppliers.       and cost advantages to nullify the smaller local com-
    Once a company pays the high price of entry - expen-        petitors. Within the first year, sales of the new product
    sive, high-output technology-it is in business.             exceeded expectations by an order of magnitude, as
       Arvind developed relationships with key buyers,          more than 250,ooo units shipped every month. Arvind
    and it applied innovative process engineering to re-        has now carved out a dominant position in the local
    duce costs below those of most competitors. Arvind’s        market.
    installed capacity in denim is now ten times that of its        For more on the prospects for diversified business
    closest Indian rival, and the company exports over half     groups operating in emerging markets, see Tarun
    of its total output. From a standing start I 3 years ago,   Khanna and Krishna Palepu, “Why Focused Strategies
    Arvind Mills is today the world’s third largest manu-       May Be Wrong for Emerging Markets,” HBR July-
    facturer of denim and the fastest growing.                  August 1997.




  emerging markets. The most successful contenders -            ley and then transferring the know-how gained
  those that have moved beyond competing solely on              there back to headquarters in Seoul. But even con-
  the basis of cost-have learned to overcome those              tenders in mature industries can benefit from look-
  disadvantages by accessing resources in developed             ing abroad.
  countries.                                                       Consider Mexico’s Cemex, which has trans-
    An extreme example is Korea’s Samsung, which                formed itself from a diversified business group into
moved to the frontier of memory chip technology                 a focused producer of cement -now the third
~ by establishing a major R&D center in Silicon Val-            largest in the world. Although Cemex enjoys low

  128                                                                       HARVARD     BUSINESS   REVIEW   March-April   1999
                                                                               COMPETING             WITH        GIANTS


production costs at home, it has had to overcome       the most successful companies will remain fo-
major disadvantages. To lower its cost of capital,     cused on their local markets, strengthening their
Cemex tapped international markets by listing its      main sources of competitive advantage. Others
shares on the New York Stock Exchange. The ac-         will build on a successful defense of their home
quisition of two Spanish cement producers in 1992      base and look for opportunities abroad, but they
put it in the backyard of a major international com-   may never make the final step up to global compe-
petitor, France’s Lafarge, and also allowed Cemex to   tition. Managers will need to revisit their assump-
shift its financing from short-term Mexican peso       tions and conclusions as the capabilities of their
debt to longer-term Spanish peseta debt. What’s        companies develop.
more, its foreign acquisitions greatly reduced the         Not only will managers find their strategies likely
company’s dependence on the Mexican cement             to evolve over time, but the nature of their industry
market, always a concern given the country’s his-      may change as well. A company in a predominantly
tory of economic volatility.                           local business may prosper because of its superior
  In addition, Cemex has aggressively sought to        service and distribution. But a competitor may
be on the forefront of information technology-         make a move that changes the industry fundamen-
a key factor for success in the logistics-
intensive cement industry. Its managers
have worked closely on systems develop-                       Not only will managers find
ment with IBM, and the company has
invested extensively in employee develop-            their strategies likely to evolve over
ment programs designed to support its em-
phasis on logistics, quality, and service.         time, but the nature of their industry
Through its efforts, Cemex has become                                  may change as well.
one of the world’s lowest-cost producers of
cement, and it has applied the lessons it
has learned to boost efficiency in its acquired com-   tally, giving advantages to global players. That is
panies. Instead of being the target of multination-    what happened in the insulin business, when the ma-
als, Cemex has since bought additional companies       jor players raised the ante by developing a superior
of its own. In the eat-or-be-eaten world of global     product - genetically engineered human insulin - at
competition, Cemex is positioning itself at the top    a fixed cost that only companies with global reach
of the food chain.                                     could justify. The new manufacturing process
                                                       drove prices below anything that local producers
                                                       could sustain.
Managing       Transitions                                Just as the structure of some industries favors
A recurring theme in these examples is the impor-      companies that operate on a large scale, so can the
tance of being flexible in response to market oppor-   structure of other industries evolve to favor compa-
tunities. This familiar advice is often forgotten by   nies operating at a small scale. In India, Arvind
managers from emerging markets, for whom indus-        Mills took a seemingly global product-blue jeans -
try boundaries have traditionally been taken as a      and refashioned it to fit the budgets of millions of
given, in many cases established by government         rural villagers. While Levi Strauss and other multi-
mandate. Liberalization is now making the struc-       nationals aim for the urban middle class, Arvind
ture of many industries much more fluid, and man-      has built a new and protected market for itself. (See
agers exposed to new kinds of competitors need to      the insert “A Tale of Two Strategies.“)
realize that they can respond by positioning their
companies in a variety of ways.                          In many emerging markets around the world to-
   By better understanding the relationship be-        day, we’ve found a fundamental dynamic. Multi-
tween their company’s assets and the particular        nationals are seeking to exploit global scale econo-
characteristics of their industry, managers can also   mies while local enterprises are trying to fragment
anticipate how their strategies may evolve over        the market and serve the needs of distinct niches.
time. As more and more companies learn to com-         The former bring an array of powerful resources that
pete in global markets, we are bound to see a grow-    can intimidate even the most self-assured local man-
ing number of aggressive contenders like Cemex.        ager. But like David against Goliath, the smaller
But few are likely to make the jump soon, in part      competitor can rise to the challenge and prevail. U
because globalization pressures in many industries
will continue to be weak. We suspect that many of      Reprint   99203    To order reprints, see the last page of this issue.


HARVARD   BUSINESS   REVIEW   March-April   1999                                                                        129

				
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