Emergence of the emerging market multinational

This is a guest post by Prof. Amitava Chattopadhyay. Amitava is The L’Oreal Chaired Professor in Marketing-Innovation and Creativity at INSEAD. His expertise is in the areas of branding, creativity, and innovation; his research has appeared in leading international journals. He is an Associate Editor for the Journal of Consumer Psychology and an Area Editor for the International Journal of Research in Marketing, and serves on the editorial review boards of the Journal of Consumer Research, Journal of the Academy of Marketing Science, and Long Range Planning. He has designed and taught in executive programs in Australia, Europe, North America, Asia, and Africa. He is on the advisory boards of several companies and universities, and is a consultant to leading multinational firms. This blog post is a preview of his forthcoming book “The New Emerging Market Multinationals: Four Strategies for Disrupting Markets and Building Brands”[1] co-authored with Rajeev Batra (University of Michigan) and with Aysegul Ozsomer (Koc

University).

In the past decade, a new breed of challenger businesses and brands have burst upon the world stage from the emerging markets (EMNCs). Companies from these markets, with names like Arcelik (Turkey), Dilmah (Sri Lanka), HTC (Taiwan), Lenovo (China), Mahindra & Mahindra (India), Natura (Brazil), and MTS (Russia), have rapidly established themselves as robust competitors, having wrested market share from the much larger developed country multinationals (TMNCs). Much has been written about their increasing stature, but exactly how these relatively-small, under-resourced EMNCs have managed to build sustainable and profitable branded global businesses, fighting against much larger incumbent market leaders, remains unanswered. This is the focus of our forthcoming book “The New Emerging Market Multinationals: Four Strategies for Disrupting Markets and Building Brands”[1] co-authored with Rajeev Batra (University of Michigan) and with Aysegul Ozsomer (Koc University).

MindsetOne reason for international success of the 39 emerging market multinationals we studied is a new mindset. They have developed

manufacturing capabilities and learned about developed-country market needs through supplier contracts; acquired technological competencies, by investing in innovation; established the quality-control, management, and supply chain processes to run global operations through learning by doing, and now are eager and prepared for the next stage of the game, which they are pursuing through four strategic paths that we have identified (see Figure): cost leader, knowledge leverager, niche customizer, and global brand builder.

Consumer Segments and International Expansion

Strategic Competency Building

Emerging/Similar Market Focus

(Speedy, Easy, short-term)

Developed/Dissimilar Market Focus(Slow, Difficult, long-term)

Mechanistic Extension - Leverage Existing

resources- Scale and cost as

main competency- Relentless focus

on cost cutting- Mastery over a

narrow but extendible technology

- Ability to identify similar customers

Knowledge Leverager- Mastery of narrow

capability e.g., making rugged and durable products

- Ability to identify markets where they can win

- Knowledge of poor customers

- Manage businesses in volatile economies, with poor infrastructure, and less-transparent regime

- e.g., Asian Paints, Aramex, Savola Foods

Cost Leader- Leverage local low cost

human resources- Relentless and continuous

focus on cost, e.g., through scale

- Develop and combine with firm specific assets, e.g., process capability, to create novel process or business models

e.g., Chigo, Infosys, Mahindra Tractors, Midea, TEMSA

Dynamic Evolution - Focused

innovation- R&D capability

acquisition- Customer insight

generation capability

- Competencies in leveraging customer insights

- Flexible manufacturing capabilities

Niche Customizer- Lower-cost ability to

customize- Self-owned,

therefore more flexible, manufacturing facilities

- Lower-cost “frugal innovation” R&D abilities

- e.g., Dabur, Marico, Mavi, Mitac

Brand Builder- Focused-Innovation-

oriented- Lower manufacturing costs

(like the cost-leaders)- Additional weapon of

lower-cost home-based R&D

- Higher investments in R&D, but at same time more focused

- e.g., Haier, HTC, Lenovo, LG

- Acquisition oriented- Bring in the supply chains,

technologies, brands, and distribution channels they currently lack

- Add on to current strengths of large volume production

- Low-cost R&D and manufacturing

- e.g., Apollo Tires, Arcelik, Lenovo, Tata Motors, Tata Tea

Cost LeadersWhile firms from the emerging markets have long pursued their cost advantages, what is new about the Cost Leader strategy is the emphasis on process innovation to dramatically reduce costs and make them scalable. Consider China’s BYD, faced with the heavy investments required in a clean room, a key requirement for manufacturing Li-Ion batteries that was beyond BYD’s financial capability, it created the “clean box”, a low cost, higher productivity, modular, and scalable innovation that helped it to dramatically reduce costs and capture 25% of the mobile phone battery market globally!

Knowledge LeveragersIndia’s Mahindra & Mahindra markets vehicles overseas building on their knowledge of manufacturing tough, rugged vehicles that less affluent consumers seek, and that perform, notwithstanding the bad roads and rudimentary service facilities that characterize emerging markets. We call this the knowledge leverager strategy. Not only can the EMNCs meet the needs of consumers in other emerging markets but, they can manage in these markets more effectively, as they are (1) more conversant with the volatile and less-transparent economic-political-regulatory regimes these markets tend to have, and (2) better able to deploy top managers from their home markets, while their TMNC counterparts struggle to convince top employees to relocate to these markets. Given the growing importance of emerging markets as a source of global growth—P&G estimates that two-thirds of its future growth will be from these markets—knowledge leveragers are tapping into a significant competency to extend and grow their branded businesses.

Niche CustomizersMarico from India focuses on pre- and post-wash hair care, targeting South Asia, the Middle East, and North Africa. Upon entering the Gulf countries, Marico quickly discovered that the local water had much higher levels of chlorine than elsewhere in the world. To deal with this, it developed a hair cream that protects against damage from highly chlorinated water, creating a significant business. It followed up with an alcohol free hair-gel, playing on the taboo on alcohol among Muslim consumers, which has become a successful offering from the Arabian Gulf, all the way through to Egypt. Marico’s strategy, the niche customizer strategy, has the firm focusing on small, neglected, special-needs segments, primarily in developing markets, leveraging their more flexible manufacturing facilities and lower-cost “frugal innovation” R&D abilities to win against the established TMNCs’ that focus ruthlessly on standardization and large-scale economies.

Global Brand BuildersHTC follows the global brand builder strategy. It has built a reputation among consumers worldwide as the “quietly brilliant” smartphone company. It is now the world’s fiftth largest smartphone manufacturer, known for its innovations in leading-edge hardware design and easy-to-use user interfaces which provide it with operating profit margins on par with that of RIM--over 16%. Given the smaller size of most emerging market firms, following this strategy requires that they carefully target limited resources at product categories, market segments, and technologies where they have a shot at leadership (e.g., HTC in Android based smartphones), and spend their small budgets in ways that quickly create tangible customer value (e.g., rapid product launches, relative to competitors, as done by HTC), if they are to have a chance to win.

A second way to build a global brand is through acquisition. Consider Lenovo: It acquired IBM’s PC business in 2004 along with the “ThinkPad” brand name. Through clever marketing, Lenovo successfully moved the “IBM ThinkPad” brand to “ThinkPad by Lenovo”, retaining ThinkPad’s traditional corporate business and growing the consumer business significantly, to become the second biggest player in the PC business. This second approach is noteworthy for three reasons: (1) it enables emerging market firms to scale up quickly by internalizing capabilities which might take years to build; (2) acquisitions can be financed through borrowing, affording these firms the opportunity to own a global brand; (3) contrary to what many strategy scholars have argued, emerging market firms are able to integrate and leverage international acquisitions, as well as, if not better, than their developed market MNC competitors.

These four strategies, driven by focused innovation that leverages the low-cost advantage of EMNCs, are transforming many emerging market firms in to global competitors who are a significant threat to TMNCs. Underscoring this, GE CEO and Chairman, Jeffrey Immelt, in a 2009 Harvard Business Review article warned ““GE has tremendous respect for traditional rivals… But it knows how to compete with them; they will never destroy GE. However, the emerging giants very well could”[i].

[1][1] For more details see http://www.emergingmarketmultinationals.com/

[i][i] Jeffrey R. Immelt, Vijay Govindrajan, and Chris Trimble, “How GE Is Disrupting Itself,” Harvard Business Review, October 2009, pp. 3–11.

[1]

[i]

Engineering Maturity Models :

This unique framework categorizes the various stages of maturity of an R&D centre and has listed them as follows:

Level 1: Engineering Support: Team supports another global team by contributing in coding, testing and QA part of the PDLC. Team lacks key design skills and product knowledge and hence is dependent on other centers for product and domain expertise.

Level 2: Module Leadership: Team develops complete module(s) (including design) for a product with minimal or no support from another global center team. Team has key design skills and fair product knowledge to manage the module autonomously.

Level 3: Engineering Leadership: Team is in charge of engineering design and development of the complete product. The team has strong domain expertise and complete product knowledge to execute product design, module design and integration. The team may be supported by other teams on coding, testing and QA activities.

Level 4: Product Leadership: Along with Engineering Leadership, the team is also responsible for business aspects such as Product Management, Customer interaction, Channel Partnerships, etc. The team devises the product roadmap and works closely with the engineering teams to get the product to market on time.

Last but not the least, this framework will not only help these MNC R&D centres in India identify gaps in maturity and capability in the current mode of operations, but also understand and gauge their maturity relative to their competitors