competing with giants

Competing withGIANTS

Survival Strategies forLocal Companies in

Emerging Marketsby Niraj Dawar and Tony Frost

In battlesfor emerging

markets, bigmultinationals

don't hold allthe advantages.

AS PROTECTIONIST BARRIERS CRUMBLE INl i emerging markets around the world, multi-national companies are rushing in to find newopportunities for growth. Their arrival is aboon to local consumers, who benefit from thewider choices now available. For local compa-nies, however, the infiux often appears to be

ARTWORK BY DAVID JOHNSON

a death sentence. Accustomed to dominantpositions in protected markets, they suddenlyface foreign rivals wielding a daunting array

Niraj Dawar is an assistant professor of marketing, andTony Frost is an assistant professor of international busi-ness, at the Richard Ivey School of Business at the Uni-versity of Western Ontario in London. Ontario. Canada.

COMPETING WITH GIANTS

of advantages: substantial financial resources, ad-vanced technology, superior products, powerfulbrands, and seasoned marketing and managementskills. Often, the very survival of local companiesin emerging markets is at stake.

Strategists at multinational corporations candraw on a rich body of work to advise them on howto enter emerging markets, hut managers of localcompanies in these markets have had little guid-

Despite the heated rhetoric surroundingglobalization, industries actually vary agreat deal in the pressures they put oncompanies to sell internationally.

ance. How can they overcome-and even take ad-vantage of-their differences with competitorsfrom advanced industrial countries? Many of thesemanagers assume they can respond in one of onlythree ways: by calling on the government to rein-state trade barriers or provide some other form ofsupport, by becoming a subordinate partner to amultinational, or by simply selling out and leavingthe industry. We believe there are other options forcompanies facing stiff foreign competition.

In markets from Latin America to Eastern Europeto Asia, we have studied the strategies and tacticsthat successful companies have adopted in theirbattles with powerful multinational competitors.Vist in Russia and Shanghai Jahwa in China, for ex-ample, have managed to successfully defend theirhome turfs against such multinationals as Compaqand Unilever. Others, including lollibee Foods inthe Philippines and Cemex in Mexico, have builton strength at home and launched international ex-pansion strategies of their own. By studying theseexamples, managers of other companies fromemerging markets can gain insight into their ownstrategic options.

Aligning Assetswith Industry CharacteristicsWhen India opened its automotive sector in themid-1980s, the country's largest maker of motorscooters, Bajaj Auto, confronted a predicament sim-ilar to what many "emerging-market" companiesface. Honda, which sold its scooters, motorcycles,and cars worldwide on the strength of its superiortechnology, quality, and brand appeal, was planningto enter the Indian market. Its remarkable success

selling motorcycles in Westem markets and in suchnearhy countries as Thailand and Malaysia waswell known. For the independent-minded Bajajfamily, a joint venture with Honda was not an op-tion. But faced with Honda's superior resources,what else could the company do?

A closer look at the situation convinced Bajaj'smanagers that Honda's advantages were not as for-midable as they first appeared. The scooter industry

was based on mature and relatively sta-hle technology. While Honda would en-joy some advantages in product develop-ment, Bajaj would not have to spendheavily to keep up. The makeup of theIndian scooter market, moreover, dif-fered in many ways from Honda's es-tablished customer base. Consumerslooked for low-eost, durable machines,and they wanted easy access to mainte-

nance facilities in the countryside. Bajaj, whichsold cheap, rugged scooters through an extensivedistribution system and a ubiquitous service net-work of roadside-mechanic stalls, fit the Indianmarket well. Honda, which offered sleekly designedmodels sold mostly through outlets in major cities,did not.

Instead of forming a partnership with Honda,Bajaj's owners decided to stay independent and for-tify their existing competitive assets. The companybeefed up its distribution and invested more in re-search and development. Its strategy has paid offwell. Honda, allied with another local producer, didquickly grab 11 % of the Indian scooter market, butits share stahilized at just under that level. Bajaj'sshare, meanwhile, slipped only a few points fromits earlier mark of 77%- And in the fall of 1998,Honda announced it was pulling out of its scooter-manufacturing equity joint venture in India.

Bajaj's story points to the two key questions thatevery manager in emerging markets needs to ad-dress: First, how strong are the pressures to glohal-ize in your industry? Second, how internationallytransferahle are your company's competitive assets?By understanding the basis for competitive advan-tage in your industry, you can better appreciate theactual strengths of your multinational rivals. Andby assessing where your own competitive assets aremost effective, you can gain insights into the breadthof business opportunities available to you. Let'stake each question in turn.

Despite the heated rhetoric surrounding global-ization, industries actually vary a great deal in thepressures they put on companies to sell interna-tionally. At one end of the spectrum are companiesin such industries as aircraft engines, memory

120 HARVARD BUSINESS REVIEW March-April 1999


chips, and telecommunications switches, whichface enormous fixed costs for product development,capital equipment, marketing, and distribution.Covering those costs is possible only through salesin multiple markets. A single set of rules governscompetition worldwide, and consumers are satis-fied with the standardized products and marketingappeals that result.

At the other end of the spectrum are industries inwhich success turns on meeting the particular de-mands of local consumers. In beer and retail bank-ing, for example, companies compete on the basisof well-established relationships with their cus-tomers. Consumer preferences vary enormouslybecause of differing tastes, perhaps, or incompatibletechnical standards. Multinationals can't competesimply by selling standardized products at lowercost. Alternatively, high transportation costs insome sectors may discourage a global presence. Inall of these industries, companies can still prosperhy selling only in their local markets.

Most industries, of course, lie somewhere in themiddle of the spectrum. International sales bringsome advantages of scale, but adapting to local pref-erences is also important. By thinking about wheretheir industry falls on the spectrum, managers fromemerging markets can begin to get a picture of thestrengths and weaknesses of their multinationalcompetitors. But they need to place their industrycarefully. As Bajaj found, industriesthat seem similar may he far apart onthe spectrum-pressures to globalizescooters turn out to be much weakerthan those to globalize automobiles.Bajaj may go global in the future, as theIndian market evolves, but it has noneed to do so now.

Once they understand their indus-try, managers need to evaluate theircompany's competitive assets. Like Bajaj, mostemerging-market companies have assets that givethem a competitive advantage mainly in theirhome market. They may, for example, have a localdistribution network that would take years for amultinational to replicate. They may have long-standing relationships with government officialsthat are simply unavailable to foreign companies.Or they may have distinctive products that appealto local tastes, which global companies may beunable to produce cost effectively. Any such assetcould form the basis for a successful defense of thehome market.

Some competitive assets may also be the basis forexpansion into other markets. A company can useits access to low-cost raw materials at home, for

example, to undercut the price of goods sold inother countries. Or a company may use its exper-tise in building efficient factories to establish oper-ations elsewhere. Assets that may seem quite local-ized, such as experience in serving idiosyncraticor hard-to-reach market segments, may actuallytravel well. By paying close attention to countrieswhere market conditions are similar to theirs, man-agers may discover that they have more transfer-able assets than they realize. The more they have,the greater their chance of success outside thehome base.

These two parameters-the strength of global-ization pressures in an industry and the degree towhich a company's assets are transferable inter-nationally-can guide strategic thinking. If global-ization pressures are weak, and a company's ownassets are not transferable, then, like Bajaj, the com-pany needs to concentrate on defending its turfagainst multinational incursion. We call a companyemploying such a strategy a defender. If globaliza-tion pressures are weak but the company's assetscan be transferred, then the company may be able toextend its success at home to a limited number ofother markets. That sort of company is an extender.

If globahzation pressures are strong, the companywill face bigger challenges. If its assets work only athome, then its continued independence will hangon its ability to dodge its new rivals by restructur-

Two parameters - the strength ofglobalization pressures in an industry and

the company's transferable assets - canguide that company's strategic thinking.

ing around specific links in the value chain whereits local assets are still valuable. Such a company,in our terminology, is a dodger. If its assets aretransferable, though, the company may actually beable to compete head-on with the multinationals atthe global level. We call a company in that situationa contender.

We can plot these four strategies on a matrix. (Seethe exhibit "Positioning for Emerging-MarketCompanies."! As with any strategic framework, ourmatrix is not intended to prescribe a course of ac-tion but to help managers think about the broadoptions available.

To gain a clearer view of all four options, let'slook at how companies have used them to succeedin a newly competitive environment. We'll start

HARVARD BUSINESS REVIEW March-April 1999 121


POSITIONING FOR EMERGING MARKET COMPANIES 1Competitive Assets

customized to home market transferable abroad

higb

low

focuses on a locally oriented link in thevalue chain, enters a joint venture, or sellsout to a multinational.

focuses on leveraging local assets inmarket segments where multinationalsare weak.

focuses on upgrading capabilities andresources to match multinationalsgiobally, often by keeping to nichemarkets.

focuses on expanding into marketssimiiar to those of the home base, usingcompetencies developed at home.

with industries where the globalization pressuresare weak, then move to industries where thosepressures are strong.

Defending withthe Home Field AdvantageFor defenders like Bajaj, the key to success is toconcentrate on the advantages they enjoy in theirhome market. In the face of aggressive and well-endowed foreign competitors, they frequently needto fine-tune their products and services to the par-ticular and often unique needs of their customers.Defenders need to resist the temptation to try toreach all customers or to imitate the multinationals.They'll do better by focusing on consumers who ap-preciate the local touch and ignoring those whofavor global brands.

Shanghai Jahwa, China's oldest cosmetics com-pany, has thrived by astutely exploiting its localorientation-especially its familiarity with the dis-tinct tastes of Chinese consumers. Because stan-dards of beauty vary so much across cultures, thepressure to globalize the cosmetics industry isweak. Nevertheless, as in other such industries,a sizable market segment is attracted to globalbrands. Young people in China, for example, are

currently fascinated by all things Western. Insteadof trying to fight for this segment, Jahwa concen-trates on the large group of consumers who remainloyal to traditional products. The company has de-veloped low-cost, mass-market brands positionedaround beliefs about traditional ingredients.

Many Chinese consumers, for instance, believethat human organs such as the heart and liver areinternal spirits that determine the health of thebody. Liushen, or "six spirits," is the name of a tra-ditional remedy for prickly heat and other summerailments, and it's made from a combination of pearlpowder and musk. Drawing on this custom, Jahwalaunched a Liushen brand of eau de toilette andpackaged it for summer use. The brand rapidlygained 60% of the market and has since been ex-tended to a shower cream also targeted at theliushen user. Unilever and other multinationalcompanies lack this familiarity with local tastes;they have found their products appeal mainly tofashion-conscious city dwellers.

For those product lines that don't have such an in-trinsic appeal to consumers, Jahwa has found that itcan compete on price. Here Jahwa has taken advan-tage of the constraints that multinational compa-nies face in adapting Western-designed products todeveloping countries. Multinationals typically op-



timize their operations on a global level by stan-dardizing product characteristics, administrativepractices, and even pricing, all of which can hampertheir flexibility. Products designed for affluent con-sumers often aren't profitable at prices low enoughto attract many buyers in emerging markets. Andeven if they are, a multinational might damage itsglobal brand by selling its products cheaply.

As a result, a number of Jahwa's foreign rivalshave been stuck in gilded cages at the top of themarket, giving Jahwa an advantage in reaching con-sumers with little discretionary income. Revlon,for example, estimates its target market in Chinato be just 3% of the country, or 39 million people,whereas Jahwa aims at over half the market. (Seethe insert "The Importance of Staying Flexible.")

Jahwa has also benefited from the sheer visibilityof the multinationals' strategies. Product formula-tions, brand positioning, and pricing are often wellknown long before a multinational launches itsbrands in a foreign market. This transparency af-fords defenders both the knowledge and the timeto preempt a new brand with rival offerings oftheir own. Jahwa quickly launched its G.LF lineof colognes, for example, to protect itself from theentry of a giobai brand targeted at the upscale ur-ban male segment, which Jahwa had ignored.

Jahwa's strategy has allowed it to weather the ini-tial opening of China's markets-a period whenmultinational companies often appear irresistibleto consumers and local competitors alike. At first,consumers often flock to foreign brands out of curi-osity or out of a blind belief in their virtues. Procter &Gamble, for example, grabbed over half the Chinesemarket for shampoo in just a few years, despite thesubstantially higher price of its product. But by fo-cusing on offerings that reflect local preferences,Jahwa was able to protect some sales and buy timein which to build up the quality of its products andmarketing. Jahwa's managers have good reason tobelieve that many consumers will eventually shakeoff their expensive infatuation with foreign brandsand go back to Jahwa and other local lines.

Other defenders have been able to blunt the forceof foreign competition by beefing up their distribu-tion network. Grupo Industrial Bimbo, the largestproducer of bread and confectionery products inMexico, seized on that asset when faced with for-eign competition. Over the years. Bimbo had builtup an extensive sales and distrihution force to getits products into tiendas. the ubiquitous cornerstores where Mexicans still do most of their shop-ping. The company employs 14,000 drivers whoblanket the country with 420,000 deliveries dailyto 350,000 clients.

THE IMPORTANCE OFSTAYING FLEXIBLE

Multinational enterprises bring enormous advan-tages when they enter emerging markets, but theyare also subjeet to important constraints. In theearly 1990s, managers of Johnson & Johnson inthe Philippines were looking for new products toboost local sales. They diseovered that young Fil-ipino women were using one of their most suc-cessful products - Johnson & Johnson baby talcumpowder-to freshen their makeup. These userstypically earried a small amount of the powder ina knotted handkerchief to use outside the home.To target this latent market, Johnson &. JohnsonPhilippines developed a compaet holder for thetalcum powder, complete with mirror and powderpuff. An advertising campaign was targeted at thissegment, and distribution was secured throughsupermarkets and corner shops.

A few days hefore the product's launch, however,corporate headquarters in the United States askedthat it be caneeled. The reason: "We are not in thecosmetics business." Uical managers were stunned.They argued that the compact would be a test oftheir ability to develop produets for the local mar-ket. Only after the chief marketer in the Philip-pines flew to headquarters and made a personalplea for the produet did the company allow thelauneh to go ahead.

The product was a great success; sales exceededprojections hy more than a factor of ten. Neverthe-less, Johnson & Johnson has not introduced theproduct in other markets. And even in the Philip-pines, the eompany has subsumed the productinto a broad line of toiletries instead of promot-ing it separately, [ohnson &. Johnson preferred togive up sales rather than run the risk of being seenas a cosmetics produeer in the company's more-established markets.

Companies hased in emerging markets don'thave to contend with such constraints arisingfrom established positions in affluent markets.Not only are they closer to their own market, hutthey are also free to let the market define them.This flexibility is one of a number of advantagesthat loeal managers may overlook when they facethe prospect of multinationals entering their ownmarket.

For more on the constraints confronting multi-national companies, see C. K. Pralialad and KennethLieberthal, "The End of Corporate Imperialism,"HBR July-August 1998.



At the time that Mexico was opening its markets.Bimbo's managers were considering a lower-costapproach that would have cut out a number of thesedaily runs to tiendas, many of which brought onlyabout $io in revenue per delivery. When PepsiCoaggressively entered the Mexican bakery market in1991, however, those plans were quickly shelved.The move shocked Bimbo's managers into examin- ,

Far from weighing down operationswith low-margin sales, the companydistrihution network was the key todefending its home turf.

ing their actual sources of competitive advantage.Far from weighing down operations with low-mar-gin sales, Bimho's distribution network was the keyto defending its home turf. The network tappedinto Mexican consumers' preference for freshnessand their habit of shopping daily at a nearhy store,creating a huge harrier to entry for foreign competi-tors. Instead of reducing deliveries. Bimbo's man-agers increased them - although they did lowercosts hy sending to the smaller tiendas trucks withmultiple products instead of the single-product de-liveries sent everywhere else. Their defensive strat-egy paid off: Bimbo has maintained leading posi-tions in each of its major market segments.

Extending Local Advantages AbroadIn some cases, companies in local industries can gobeyond defending their existing markets. With theright transferable assets, these extenders can usetheir success at home as a platform for expansionelsewhere. A selective policy of international ex-pansion, carefully tied to the company's key assets,can reap added revenue and scale economies, not tomention valuable learning experiences.

Extenders can leverage their assets most effec-tively by seeking analogous markets - those similarto their home hase in terms of consumer prefer-ences, geographic proximity, distribution channels,or government regulations. Expatriate communi-ties, to take a simple case, are likely to be receptiveto products developed at home.

JoUihee Foods, a family-owned fast-food com-pany in the Philippines, has extended its reach byfocusing on Filipinos in other countries. The com-pany first overcame an onslaught from McDonald'sin its home market, partly hy upgrading service

and delivery standards but also by developing ri-val menus customized to local tastes. Along withnoodle and rice meals made with fish, JolUhee cre-ated a hamburger seasoned with garlic and soysauce-allowing it to capture 75% of the burgermarket and 56% of the fast-food business in thePhilippines. Having learned what it takes to com-pete with multinationals, Jollibee had the confi-

dence to go elsewhere. Using its battle-testedrecipes, the company has now establisheddozens of restaurants near large expatriate

I populations in Hong Kong, the Middle East,^ and California.

Similarly, managers can look for countrieswith a common cultural or linguistic her-itage. Televisa, Mexico's largest media com-pany, used that approach to become theworld's most prolific producer of Spanish-

language soap operas. Recognizing that its pro-grams would have considerable value in the manySpanish-speaking markets outside Mexico, thecompany targeted export markets in Latin Amer-ica, Spain, the U.S. border states, and Florida. Re-cently, Televisa has hegun its own news broadcasts,teaming up with Rupert Murdoch's News Corpora-tion for distribution to Spanish-language marketsworldwide.

The concept of analogous markets can be stretchedfar indeed. India's Asian Paints controls 40% of themarket for house paints in its home base, despiteaggressive moves by such major multinationals asICI, Kansai Paints, and Sherwin Williams. Thecompany has thrived against foreign competitorsby developing its local assets, notably an extensivedistribution network. Its paint formulations andpackaging practices make for an extremely low-cost product-one that, its managers have discov-ered, holds considerable appeal in other developingcountries. After its success exporting to neighborssuch as Nepal and Fiji, the company is now pursu-ing joint ventures abroad.

Asian Paints brings substantial advantages tothese countries. Its managers are used to dealingwith the kind of marketing environment there-thousands of scattered retailers, illiterate consum-ers, and customers who want only small quantitiesof paint that can then he diluted to save money.Multinational rivals, by contrast, have built theiroperations around the demands of affluent cus-tomers looking for a wide choice of colors and fin-ishes. Their expatriate managers are used to air-conditioned offices and bottled water that costsmore per liter than most customers are willing topay for paint. Even after they develop a low-endpaint product, the multinationals will still have a



long way to go to catch up in emerging markets.Asian Paints already knows how to speak the lan-guage of these customers.

Dodging the OnslaughtIn industries where pressures to globalize arestrong, managers will not be able to simply build ontheir company's local assets-they'll have to re-think their business model. If their assets are valu-able only in their home country, then the bestcourse may be to enter into a joint venture with, orsell out entirely to, a multinational. The Czech car-maker Skoda took that latter step after the collapseof the Soviet Union in 1989. Like many companiesin communist countries, Skoda's position as an of-ficial producer under the old Soviet regime had al-lowed the company simultaneously to survive andto stagnate. Only the choice-starved consumers inthe former Eastern bloc could appreciate Skoda'scars, and even they recognized how outdated thedesigns were, how poor the quality was, and howlimited the appeal of the brand was compared withWestern makes.

When markets opened in Eastern Europe, Skoda'sposition became untenable. Multinational carmak-ers arrived with the sort of insurmountable advan-tages made possible by their global scale: superiormodels, well-known brands, and financial muscle.The Czech government soon sold the company toVolkswagen, which subsequently re-

the interior of the country through an extendeddealer network and developed exclusive distribu-tion agreements with several key retailers. It alsoestablished its own full-service centers in dozensof Russian cities.

That approach was well suited to the Russiancomputer market, which is still in its early stages.Russians need much more information and reassur-ance than most Western buyers before they willpurchase a computer, and they appreciate a localpresence. All of Vist's manuals are in Russian, andthe company provides lengthy warranties, unlikerivals, which simply sell extended service con-tracts. The computers that Vist sells-the productof a low-cost assembly operation using mostly im-ported components-are unremarkable; neverthe-less its downstream assets have made Vist the lead-ing brand in Russia with 20% of the market. And asthe Russian computer market advances, Vist's net-work of service centers will alert the company tochanges hefore its rivals see them.

Just as defenders focus on market segments re-sponsive to their local strengths, dodgers like Vistmove to links in the value chain where their localassets still work well. But, as Skoda's experienceshows, not all companies can make the jump thatdodgers have to make. Vist was able to restructurearound distribution and service because it was al-ready active in those areas,- Skoda had little room tomaneuver because it was devoted almost entirely

structured Skoda's operations, invested l i iheavily in new products and technology. Where glohalization pressuTes are strong,

managers can't just huild on tlieircompany's local assets; they will have

to rethink tlieir husiness models.

and positioned it as the value brand inVolkswagen's global line of vehicles.

In many cases, however, there are al-ternatives to selling out. Consider theRussian personal-computer maker Vist.When Russia liberalized its economy,Vist's managers knew they would winfew battles going head to head with the likes ofCompaq, IBM, and Hewlett-Packard. Rather thansell out or seek a joint venture, however, they side-stepped oblivion by redefining their core business.They dodged the global threat by focusing on linksin the value chain where Vist's assets providedcompetitive advantage. Instead of viewing the com-pany as a manufacturer of personal computers, theyincreasingly emphasized the downstream aspectsof Vist's existing business-distribution, service,and warranties.

While its multinational rivals concentrated onselling machines to government and corporatemarkets in Moscow, Vist took advantage of itsfamiliarity with the wider market. It reached into

to one part of the value chain. Skoda also had enor-mous investments in capital-intensive manufac-turing [not to mention a large number of jobs) thatthe Czech government was understandably reluc-tant to drop in order to refocus on other parts of thebusiness.

While distribution and service are common re-courses for dodgers, there are others. One approachis to supply products that either complementmultinationals' offerings or adapt them to localtastes. When Microsoft moved into China, for ex-ample, local software companies shifted their focusfrom developing Windows look-alike operating sys-tems to developing Windows application programstailored to the Chinese market.



Dodgers can also move to the other end of thevalue chain. As Mexico has opened its markets,many manufacturing companies have reorientedthemselves, becoming local component supphers tothe newly built factories of foreign multinationals.

Dodging may be the most difficult of the fourstrategies to execute because it requires a companyto revamp major aspects of its strategy-and to do sobefore it's swept under by the tide of foreign compe-tition. But by focusing on carefully selected niches,a dodger can use its local assets to establish a viableposition.

Contending on the Global LevelDespite the many advantages of their multinationalrivals, companies from emerging markets shouldnot always rule out a strategy of selling at the globallevel. If their assets are transferable, they may beable to become full-fledged multinationals them-selves. The number of these contenders is steadilyincreasing, and a few, such as Acer of Taiwan andSamsung of Korea, have become household names.The reasons for their success are similar to those ofany thriving company that competes in a global in-dustry. However, contenders often have to takeinto consideration a different set of opportunitiesand constraints.

Most contenders are in commodity industrieswhere plentiful natural resources or labor givethem the low-cost advantage. From Indonesia, In-dah Kiat Pulp & Paper (IKPP), for example, has ag-gressively moved into export markets by drawingon a ready supply of logs-the product of favorabletropical growing conditions, low harvesting costs,and government-guaranteed timber eon-cessions. In its core paper business, itenjoys production costs that are nearlyhalf those of its North American andSwedish competitors, a huge advantagein export markets.

IKPP's eost advantage is not due en-tirely to geography. The company hasalso invested heavily in advanced maehinery tomake its production more efficient. This is an im-portant lesson for all eompanies trying to capitalizeon lower costs of resourees or labor, particularly asmultinationals set up their own operations in de-veloping countries. Rather than being content to letresources provide the sole advantage, contendersneed to measure themselves against the practices ofleading companies in their industry. Many, likeIKPP did, will find their quality or productivitylevels lacking. Others will have severe deficienciesin service, delivery, or packaging. As a result, the

cost advantage they enjoy will often be underminedby deficiencies in other areas. But hy moving to-ward the productivity, quality, and service levels oftheir competitors from developed countries, localcontenders in commodity industries can build asustainable basis for long-term competitive success.

For would-be contenders that lack access to keyresources, finding a distinct and defensible marketniche is vital. One increasingly eommon approachis to join a production consortium, in which a leadcompany manages a regional or global web of com-ponent developers and suppliers. Few emerging-market eompanies have the market presence, coor-dination capabilities, or innovative technologythey would need to act as the lead organization ina far-fiung production network. Most of them willneed to concentrate on building scale and exper-tise along partieular pieces of their industry'svalue chain.

When General Motors decided to outsouree theproduction of radiator caps for its North Americanvehicles, India's Sundaram Fasteners seized the op-portunity to go glohal. Sundaram bought an entireGM production line, moved it to India, and a yearlater became the sole supplier of radiator caps toGM's North American division. In addition to theohvious benefits to the bottom line that accruefrom the guarantee of selling 5 million radiator capsa year, participation in GM's supply network madeit easier for Sundaram to develop its capabilitiesand learn about emerging technical standards andevolving customer needs. Sundaram was one of thefirst Indian companies to achieve QS 9000 certifi-cation, a quality standard developed by U.S. auto-makers, which GM requires for all its component

For would-be contenders that lack accessto key resources, finding a distinct and

defensible market niche is vital.

suppliers. The skills learned during the certificationprocess also benefited Sundaram's core fastenerbusiness, putting it in a position to target the Euro-pean and Japanese markets. Unlike local suppliersto multinational companies, Sundaram's Indian op-erations are capable of supplying faetories all overthe world. (See the insert "How to Stay Independentwith Partnerships.")

Sundaram was able to transfer the knowledge itgained hy being part of a production consortium di-rectly to its core business. But finding a viable nichein a global industry usually means an extended



I HOW TO STAY INDEPENDENT WITH PARTNERSHIPS

For companies in many emerging markets, giving upcontrol is the option of last resort. This is especiallytrue for the family-owned businesses that play a lead-ing role in most of these economies. But alliances withmultinationals do not always involve a loss of inde-pendence. When carried out within well-defined para-meters, they can actually help a company preserve itsfreedom in the face of competitive threats.

Companies using any of the four strategies tocounter the entry of multinationals into their marketscan benefit from forming alliances, but the nature andobjectives of the alliances will differ depending onwhich strategy they adopt. Alliances can help defend-ers fortify their positions. Shanghai fahwa, for exam-ple, saw that multinational rivals were offering abroader product line than it could. By forming allianceswith the Japanese companies Kanebo and Lion, lahwawas able to offer to the distribution trade a line ofhousehold and personal care products as broad as thoseof the competition. lahwa was careful, however, tolimit the partnership to a small part of its lineup,which enabled it to maintain financial and managerialcontrol over its products. Dtnlgers can also benefit byestablishing similar sorts of limited partnerships to BIlgaps in their capabilities quickly as they move to a dif-ferent part of the value chain and redefine themselves.

For extenders and contenders, alliances are oftenessential. They can range from supply chain partner-ships, like the one Sundaram Fasteners joined withGeneral Motors, to distrihution arrangements with re-tailers in other countries. Forming manufacturingpartnerships to supply private-label gtxuis may be theonly way for many companies to crack internationalmarkets. Before investing in its own brands and be-coming a full-fledged contender, Acer of Taiwan madecomputers for sale under the Compaq brand; similarly,Kia Motors of Korea manufactured the Ford Fiesta.

Private-label partnerships can be useful even forextenders that have no global ambitions. Balsara, anIndian hygiene-products and cosmetics companybest known for its Promise brand of clove toothpaste,is facing stiff domestic competition from Colgate-Palmolive. Balsara's managers are committed to de-fending their home market, but Colgate's strengthsas an international brand are imposing. By winningprivate-label toothpaste agreements from such non-rivals as Henkel and the Beecham Group, Balsara wasable to strike back at its rival's turf in the West. Butmore important, the partnerships enabled Balsara toupgrade its factories and the quality of its productsand packaging-improvements that will help thecompany protect its market share at home.

process of restructuring. Many companies mayhave to shed businesses that can't be sustained onthe global level. To many managers in emergingmarkets who are conscious of links between theirbusinesses, tbat process will be difficult. But sbed-ding businesses, outsourcing components previ-ously made in-house, and investing in new prod-ucts and processes are the keys to repositioningcontenders as focused, global producers. Indeed, tbeneed to get smaller before getting larger is one oftbe major tbemes in tbe corporate restructuringprocess under way in Eastern Europe.

In Hungary, Raba, for example, used to produce adiverse line of vebicles and components - from en-gines and axles to complete buses, trucks, and trac-tors. Wben markets in Eastern Europe opened, tbecompany faced a collapse in demand. Yet as tbe au-tomotive industry rapidly consolidated globally,Raba managed to avoid Skoda's fate. It foeused ontbe worldwide market for beavy-duty axles, a seg-ment in wbicb its tecbnology was fairly close to thestandards of internationnl competitors. Restructur-

ing has paid off, especially in tbe United States,wbere tbe company bas captured 25% of tbe largemarket for heavy-duty tractor axles. Axles now ac-count for over two-tbirds of Raba's sales, and nearlyall of tbem arc exported.

By contrast, tbe company's remaining operationin the wider engine and vebicle market, wbere itoperates only in Eastern Europe, is faeing a severeeballenge from sucb major multinationals as Cum-mins and DaimlerChrysler. Despite Raba's exten-sive service network, tbe globalization pressures intbat industry, tbrougbout its value cbain, may betoo strong to witbstand.

Perbaps tbe greatest eballenge for contenders isto overcome deficiencies in skills and financial re-sources. Especially in higb-tecb industries, wbereproduct life cycles are sbort, contenders are oftenput at a disadvantage by tbeir distance from lead-ing-edge suppliers, customers, and competitors.Tbe cost of capital is also much higher for tbemthan it is for tbeir multinational rivals, a direct re-sult of tbe greater political and economic risk in



A TALE OF TWO STRATEGIES

It's not just individual businesses that need to considerhow tbeir competitive assets match the globalizationpressures of their industry. Many companies fromemerging markets belong to multihusiness organiza-tions. By mapping their business portfolio on the ma-trix, tbe heads of diversified companies in emergingmarkets can see potential trouble spots and areas ofopportunity, and make decisions accordingly.

India's Arvind Mills is a good example of a companythat pursued opposite strategies in adjusting its differ-ent husinesses to competitive threats. In the 1980s,Arvind found itself being squeezed by low-cost foreignintegrated mills and nimble domestic power-loom op-erators. Stuck in the middle, Arvind's managers real-ized that the company would not he viable if India'stextile industry hecamc fully llheralized. Central totheir company's turnaround was their recognitionthat, despite similar symptoms, their two main husi-nesses were suffering from different maladies - and re-quired different cures.

Success in the fabric division increasingly dependedon economies of scale, and the managers decided thatthe company could survive only hy moving onto theglohal stage. As contenders, they were careful to con-centrate on a niche market that allowed them to catchup with existing producers quickly. That market wasdenim, a fabric that at the time accounted for only10% of Arvind's output. The denim fahric itself is es-sentially a commodity; while fashions in denim dochange, those changes are imposed hy the apparelmakers, not the cloth manufacturers. A few large buy-ers choose from a fragmented hase of cloth suppliers.Once a company pays the high price of entry-expen-sive, high-output technology-it is in husiness.

Arvind developed relationships with key buyers,and it applied innovative process engineering to re-duce costs helow those of most competitors. Arvind'sinstalled capacity in denim is now ten times that of itsclosest Indian rival, and the company exports over halfof its total output. From a standing start 13 years ago,Arvind Mills is today the world's third largest manu-facturer of denim and the fastest growing.

Arvind's managers focused on denim for the appareldivision as well, hut they chose a completely differentstrategy. Going glohal in apparel would have heen pro-hihitively expensive-developing a glohal consumerbrand is heyond the resources of most contenders,which is why they almost always specialize in pro-ducer goods. Arvind's managers went on the defensiveand emphasized the local aspects of the industry'svalue chain - tailoring and distrihution. They huiltcapahilities and local hrand appeal to sell jeans specif-ically m India. Recognizing that major hrands likeLevi's would have little choice hut to target the topend of the market, Arvind saw huge potential in themass-market segment, which would include manyfirst-time jeans buyers. The question was how to makethe price attractive to those consumers,

Arvind's radical solution was to launch a hrand-Ruf & Tuf - sold in kit form. The kit consisted of fab-ric, a metal zipper and rivets, a leather Ruf & Tufpatch, a pattern, and sewing instructions. The com-pany launched the concept in conjunction with a ma-jor advertising campaign and an education programintended to reach some 6,000 tailors.

Arvind's insight was to accommodate its product tolocal huying practices. It was the custom of peopleto purchase fabric and use local tailors to stitch thefinal product. The company knew that major multi-nationals would he powerless to follow that approachsince local tailoring undermined a key value proposi-tion of foreign brands-the consistency of the product.

At the same time, Arvind could use its marketingand cost advantages to nullify the smaller local com-petitors. Within the first year, sales of the new productexceeded expectations by an order of magnitude, asmore than 250,000 units shipped every month. Arvindhas now carved out a dominant position in the localmarket.

For more on the prospects for diversified businessgroups operating in emerging markets, see TarunKhanna and Krishna Palepu, "Why Focused StrategiesMay Be Wrong for Emerging Markets," HBR July-August 1997-

emerging markets. The most successful contenders -those that have moved beyond competing solely onthe basis of cost-have learned to overcome thosedisadvantages by accessing resources in developedcountries.

An extreme example is Korea's Samsung, whichmoved to the frontier of memory chip technologyby establishing a major R61D center in Silicon Val-

ley and then transferring the know-how gainedthere back to headquarters in Seoul. But even con-tenders in mature industries can benefit from look-ing abroad.

Consider Mexico's Cemex, which has trans-formed itself from a diversified business group intoa focused producer of cement-now the thirdlargest in the world. Although Cemex enjoys low



production costs at bome, it bas bad to overcomemajor disadvantages. To lower its cost of capital,Cemex tapped international markets by listing itssbares on tbe New York Stock Excbange. Tbe ac-quisition of two Spanish cement producers in 1992put it in tbe backyard of a major international com-petitor, France's Lafarge, and also allowed Cemex toshift its financing from short-term Mexican pesodebt to longer-term Spanish peseta debt. What'smore, its foreign acquisitions greatly reduced tbecompany's dependence on the Mexican cementmarket, always a concern given tbe country's bis-tory of economic volatility.

In addition, Cemex bas aggressively sougbt tobe on the forefront of information tecbnology-a key factor for success in tbe logistics-intensive cement industry. Its managersbave worked closely on systems develop-ment with IBM, and tbe company basinvested extensively in employee develop-ment programs designed to support its em-phasis on logistics, quality, and service.Tbrougb its efforts, Cemex has becomeone of the world's lowest-cost producers ofcement, and it has applied tbe lessons itbas learned to boost efficiency in its acquired com-panies. Instead of being tbe target of multination-als, Cemex has since bought additional companiesof its own. In tbe eat-or-be-eaten world of globalcompetition, Cemex is positioning itself at tbe topof the food cbain.

Managing TransitionsA recurring tbeme in these examples is tbe impor-tance of being flexible in response to market oppor-tunities. Tbis familiar advice is often forgotten bymanagers from emerging markets, for whom indus-try boundaries bave traditionally been taken as agiven, in many cases established by governmentmandate. Liberalization is now making the struc-ture of many industries mucb more fluid, and man-agers exposed to new kinds of competitors need torealize tbat tbey can respond by positioning tbeircompanies in a variety of ways.

By better understanding tbe relationsbip be-tween tbeir company's assets and tbe particularcharacteristics of tbeir industry, managers can alsoanticipate bow their strategies may evolve overtime. As more and more companies learn to com-pete in global markets, we are bound to see a grow-ing number of aggressive contenders like Cemex.But few are likely to make tbe jump soon, in partbecause globalization pressures in many industrieswill continue to be weak. We suspect that many of

the most successful companies will remain fo-cused on tbeir local markets, strengtbening theirmain sources of competitive advantage. Otberswill build on a successful defense of tbeir bomebase and look for opportunities abroad, but tbeymay never make tbe final step up to global compe-tition. Managers will need to revisit tbeir assump-tions and conclusions as tbe capabilities of tbeircompanies develop.

Not only will managers find their strategies likelyto evolve over time, but tbe nature of tbeir industrymay cbange as well. A company in a predominantlylocal business may prosper because of its superiorservice and distribution. But a competitor maymake a move that changes tbe industry fundamen-

Not only will managers findtheir strategies likely to evolve over

time, but the nature of their industrymay change as well.

tally, giving advantages to global players. That iswhat happened in tbe insulin business, wben tbe ma-jor players raised the ante by developing a superiorproduct - genetically engineered buman insulin - ata fixed cost tbat only companies witb global reachcould justify. Tbe new manufacturing processdrove prices below anything that local producerscould sustain.

Just as tbe structure of some industries favorscompanies tbat operate on a large scale, so can tbestructure of other industries evolve to favor compa-nies operating at a small scale. In India, ArvindMills took a seemingly global product-blue jeans-and refashioned it to fit tbe budgets of millions ofrural villagers. Wbile Levi Strauss and other multi-nationals aim for tbe urban middle class, Arvindhas built a new and protected market for itself. (Seetbe insert "A Tale of Two Strategies.")

In many emerging markets around the world to-day, we've found a fundamental dynamic. Multi-nationals are seeking to exploit global scale econo-mies wbile local enterprises are trying to fragmenttbe market and serve tbe needs of distinct niches.Tbe former bring an array of powerful resources thatcan intimidate even the most self-assured local man-ager. But like David against Goliatb, tbe smallercompetitor can rise to the eballenge and prevail. ^

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