Scaling a Startup in Emerging Markets

Welcome to HBR on Strategy case studies and conversations with the world's top business and management experts hand selected to help you unlock new ways of doing business. If you're a fast growing company in an emerging market, how can you compete today in your home market and eventually elsewhere as well? John Julen says the challenge is building a strategy you need for both markets simultaneously. Julens is a long time management consultant who specializes in corporate and business unit strategy. In this episode you'll learn why so many companies in emerging markets wrongly focus on execution and first mover advantage. Instead, Julens argues that companies need to lay the strategic foundations for long term success early on or risk flaming out. This episode originally aired on HBR IdeaCast in February 2014. Some of the market conditions have shifted since then, but the insights in this conversation are still relevant. And just a note, we recorded this by phone. While the audio quality is not great, the conversation is. I think you'll enjoy it. Here it is.

Welcome to the HBR IdeaCast from Harvard Business Review. I'm Andy O'.

Connell.

John I'm joined on the phone today by John Julens, a partner at Booz & Co. And co leader of the firm's engineered products and services practice in China. John, welcome to the.

Program. Thanks Andy. Thanks for having.

Me. You've written a fascinating article titled How Emerging Giants Can Take on the World. It appears in the December 2013 issue of HBR and in it you make a couple of counterintuitive points about big corporations and emerging markets. But first, since there's so much in the news lately about slowdowns in China and slowdowns in other emerging markets, John, I'd like to ask you about that. What's happening? Are we seeing something fundamental changing in emerging.

Markets? No, I don't really think so. I think what's happening with emerging markets right now is mostly driven by the investment community. So I think it is hot money that's been flowing in and now out of emerging markets. The way that's impacted different emerging markets has been different. So if I look at China, for example, their capital controls in place, so there's never much hot money that flowed in and therefore it's not flowing out. And so the slowdown that you see in China is actually much more policy driven and has to do with the fact that China is trying to make the transition from an emerging economy to a developed economy. So it's trying to navigate the so called middle income trap. And in order to do that, it is slowing down, deliberately slowing down its economy. That's very different than a country like India where it's much more related to, again, hot money, investor money flowing in and now out of the.

Country. Speaking of transitions in China, you write in your article that a lot of large companies have really struggled in China as they've tried to make the transition from being local champions to global companies. Some of them have flamed out, some of them have really run into all kinds of trouble. And you make the case that there are some misconceptions about large companies in emerging markets. Do you want to talk about.

That? Yeah. So there is sort of a duality in the sense that companies in China or in emerging markets in general are on the one hand pioneers in their home markets. And so they're the ones who are for the first time producing products like appliances and cars, computers and so on. But at the same time, they're competing in industries that are globally already mature, with well established, well resourced competitors. And I think that's very important because the strategy and the capabilities that are required to be a successful pioneer. So things like a bold vision, risk tolerance, flexibility, speed and so on are of course not the same as what you need to do to catch up to world class competitors, which is much more around a systematic process of developing capabilities to compete with those competitors in your home market and elsewhere. And so the challenge is that you have to do both simultaneously and that you have to be balanced. And the issue has been that there's a conventional wisdom out there that in emerging markets, strategy doesn't really matter. It's all about execution and it's all about getting ahead, about first mover advantages and so on. And so what you see is that a lot of companies focus on that early, are very successful early on, but never really laid a foundation for long term success, and then flame out at some point, usually quite unexpectedly and quite.

Suddenly. How did that play out in the case of, let's say, byd, the Chinese.

Automaker? So BYD is a very interesting example that we talk about in the article and that we contrast with another company called Great Wall in the same industry. So BYD was founded back in 1995 as a low cost manufacturer of lithium ion batteries and was very successful and continues to be successful there. And at some point around 2002, 2003, forward integrated into the automotive industry. And they did that on the basis of a bold vision around becoming the Chinese market leader by 2015, global market leader by 2025, and really the underlying thought that the industry would transform and go from internal combustion engines to electrified powertrains that being a leading producer of lithium ion batteries would give you an advantage in that market. And so BYD very aggressively invested in that and probably over invested in that. And so initially was very successful, attracted an investment that was all publicized from Warren Buffett and developed very quickly. And they did so by essentially copying products from others, particularly a product called the F3, which is a derivative of the Toyota Corolla, being very vertically integrated and really being very successful early on. However, over time they over invested in capacity. It's one thing to produce a derivative product that's required another to produce the next generation of that. It's a challenge to build up a retail network and so on. So it's a classic example of a company that initially did very well but then overextended itself and then got into.

Trouble. And then Great Wall didn't have the same.

Trajectory. No, not at all. So Great Wall was founded a little bit earlier, so around 1984 or so. It was initially a vehicle repair colle and then also forward integrated, so to speak, or backward integrated into automotive, but it did so in a much more gradual and systemic way. And if you look at their founder, Mr. Wei, Mr. Wei talks about being stronger first and then bigger. And so Grade Wall was much more gradual, much, much slower and much more deliberate. So they initially focused on pickup trucks and SUVs which were underserved segments at the time in China, and they grew much more carefully. So they were quite good at leveraging certain partnerships with foreign players to build up their own capabilities and so on through the supply base. They never started making sedans until about 2008, are now beginning to expand internationally, but also much slower in doing that. And so Great Wall operated below the radar screen for a long time, but then when they were ready, started to grow and are now the leading domestic player and doing very.

Well. Do you see a certain predictable set of stages or development of these large corporations from emerging markets as they go through their growing.

Pains? Yeah, I think there are at least four stages and each one of them is quite different in terms of the mindset, strategically what you're trying to accomplish and the types of capabilities that you're trying to build. And the first stage, as I've called seize the moment, the second, build strength, third one, scale up and consolidate and the fourth one, move up and out. And again, each one is really quite different in terms of as a company, what you're trying to accomplish and what you're focusing.

On. And what are some of the lessons for Companies that have not, they've developed their capabilities locally, but they really haven't gone across borders, they really haven't become global companies yet, but they're certainly looking at that, that's the next stage. What is the advice for the leadership of these.

Companies? Well, I think my advice would be is that you have to be very aware of where you are in these stages. And so there's a set of checkpoints that I think you have to look at internally that is around how mature are your own capabilities and where are you along this spectrum and across these four stages that I described and externally, how is the industry evolving along those same dimensions and even how is your country, the economy itself transforming and transitioning from what in China's case, for example, was a planned economy to much more of a market based economy over time. So I think you want to be very aware of where you are and therefore what your objectives should be and be much more balanced in terms of on the one hand, of course you want to have growth, but you also want to be profitable. You want to capture market share and capture first mover advantages, but you also want to make sure that you're focusing much more internally and around laying the, the foundation that you need in terms of.

Capabilities. Are you seeing the same patterns repeated in other parts of the world? I know you're very focused on China, but are you seeing the same patterns in South America and other parts of.

Asia? Yeah, I think we do. So if you look at the usual suspects, the emerging market companies that have made it, so to speak, are well on their way. There's a set of companies in China that we always talk about, so you can talk about Great Wall like we just did, Huawei, Lenovo, Haier and so on. But when you look at other well known examples like Embraer or Cemex or Bimbo in Brazil, some of the Indian companies in the IT space or Liont and so on, I think you see variations on the same theme over and over again. And so you see these companies moving through these stages, you see them having a much more balanced focus. You see them focusing on being capable and not just big, strong and not just fast and so on. So you see a lot of variations on the same theme. And you see that, I think, not just in China, but across all of these emerging.

Markets. It sounds as though you're advocating almost that emerging market companies adopt some of the pace and some of the deliberateness and some of the strategizing that large established global corporations have been using for years. American companies European companies. But wouldn't that undermine the great strength of emerging market companies that they are so fast and so agile and so.

Opportunistic? No, I don't think the two are mutually exclusive. I think what you focus on can be very, very different. And so in each of these four stages, again, and maybe it'd be useful if I go through them. What you focus on and what you're being deliberate about, so to speak, will change. So I think in the first stage it's all about can I spot the opportunity to begin with, can I capitalize on that and can I sort of navigate all of these gaps and voids, some people call them institutional voids that are out there. And local companies are of course much better able to do this. And I think this is maybe where some of the misconception comes from, is that a local company is probably, it's a private company, it's probably 30, 40 something type of entrepreneur instead of a 20 something in mom's garage, reinventing or inventing a completely new product and reinventing an entirely new industry. It's typically someone who is older, who is very well connected in the industry, very experienced in the industry, and someone who somehow has access to startup capital. So someone who's able to get started and someone who's able to adapt the existing business model in the developed world. Because again, these are products that probably already exist. There's probably an existing or an established way of developing, marketing and selling that product, but you have to adapt that to the local market. And this can appear almost magical in terms of their ability to do this and to navigate the local environment. They're able to do that much better than international companies. So again, that would seem almost magical in how they outwit, seemingly outwit the multinationals at every turn. The problem with that is that what they wind up with over time is just a patchwork of quick fixes, pragmatic fixes, good fixes, but nevertheless quick fixes, workarounds and so on, and a set of mismatch capabilities. And then what happens in the next stage is that as the industry then matures, as the proverbial water level starts dropping, things become more competitive. They don't have the foundation, so they've never laid the foundation to be competitive in a more competitive world. So what I'm advocating is that as you move from stage one to stage two, so once you've gotten started in the business, that you need to be very focused on starting to build a set of foundational capabilities and to start linking those capabilities internally across different functions and externally around supply chain partners, channel partners, and so.

On. So the real magic is capability, not necessarily.

Opportunism. Yeah, it's about laying a foundation that allows you to be successful later. It is about, I think, being deliberate about what you do. But that doesn't necessarily mean locking yourself in and being inflexible and being focused. So I think early on you do want to remain flexible. You do want to remain open. You want to build a set of basic foundational capabilities. Only later then do you transition into something that we would recognize in developed markets where you really do. Like I said, at that point, you want to focus on differentiation. You want to build a set of differentiated capabilities and then really kind of lock yourself in. But not.

Earlier. John, thank you again for talking to me.

Today. Thanks for having.

Me. That was John Julens in conversation with Andy O' Connell on HBR IdeaCast. Julens is a longtime management consultant who specializes in corporate and business unit strategy. We'll be back next Wednesday with another hand picked conversation about business strategy from Harvard Business Review. If you found this episode helpful, share it with your friends and colleagues and follow our show on Apple Podcasts, Spotify or wherever you get your podcasts. While you're there, be sure to leave us a review. And when you're ready for more podcasts, articles, case studies, books and videos with the world's top business and management experts, find it all@hbr.org this episode was produced by Ann Sani and me, Hannah Bates. Ian Fox is our editor. Special thanks to Maureen Hoch, Ramsey Kabaz, Nicole Smith, Erica Truxler, Anne Bartholomew and you, our listener. See you.