We thank our contact persons at Scrabbles SIS and our research partners in Poland, Lithuania and Vietnam for many stimulating discussions, and Bent Petersen (Copenhagen Business School) and Zen Yipping (Peking university) for sharing their Insights in the Chinese brewing Industry. Comments by Arnold Schuss, Mike Penn, Sheila Puffer, Tina Petersen and Peter Kara as well as conference participants at the 2nd SIAM workshop on ‘International Strategy and Cross-cultural Management’ In Edinburgh University, and seminar participants at Copenhagen Business School are gratefully acknowledged.
All errors remain the authors’ own responsibility. Abstract Multinational enterprises (Mines) are expanding their global reach, carrying their products and brands to new and diverse markets In emerging economies. As they tailor their strategies to the local context, they have to create product and brand oratorios that match their competences with local needs. A multi-tier strategy with local and/or global brands may provide Mines with the widest reach into the market and the potential for market leadership.
However, it has to be supported with an appropriate combination of global and local resources. Foreign entrants thus have to develop operational capabilities for the specific context, which requires obstacles and the structural weaknesses of local businesses often inhibit the direct acquisition of such firms, foreign investors may pursue UN-conventional strategies, such as staged, multiple, indirect, or Brownfield acquisitions, to acquire local resources.
We outline these strategies for penetrating local markets by acquisition of local firms, and illustrate them with the entry and growth of Scrabbles Breweries in four very different emerging economies: Poland, Lithuania, Vietnam and China.
Globalization brings multinational enterprises (Mines), their products and their brands into ever more remote corners of the world. The large number of potential customers in emerging economies raises expectations of unprecedented emend for consumer goods, if only the right products could be delivered in the right places. Yet, Mines encounter business environments in emerging economies that are not only different from those with which they are familiar, but that also vary greatly from each other. The main attraction of emerging economies is their high economic growth and the corresponding expectation of rapidly increasing demand for consumer goods. Thus, as C. K. Parallax argues passionately, there is money to be made “at the bottom of the pyramid”. The sheer number of people with a low income makes even the less developed parts of the world attractive to business.
However, these markets pose unique challenges due to their less sophisticated institutional environment and the weak resource endowment of local firms. Businesses may have to develop different strategies and new business models to serve not only the few wealthy customers in these areas, but also the mass market. The appropriate positioning of the product portfolio is crucial to success in emerging economies. As Dewar and Psychotherapy outline, emerging economies comprise very diverse groups of customers that may have to be targeted with different products, brands and even business models.
Consequently, potential entrants face tradeoffs between developing a global brand for the premium segment, where substantive margins can be earned, and developing products with large-scale and cost-efficient production for the mass markets and earning profits through volume. International marketing scholars debate the trade-offs of global standardization and local adaptation in emerging economies. In addition to global or local brand strategies, many Mines combine them in a multi-tier strategy that aims to reach both the mass market and the premium segment.
We argue that this strategy may be articulacy suitable for emerging economies where the large distance between the premium and mass markets is typically big. However, the appropriate strategy depends on the nature of the investor’s resources. Market penetration starts with the entry strategy, which has to provide access to local resources, such as distribution networks and access to local businesses and authorities. In emerging economies, investors have to think beyond the conventional entry modes of Greenfield, acquisition and Joint venture OVA).
We introduce a more differentiated typology of acquisition strategies that provides better support for managerial decisions. In particular, we distinguish between entry modes suitable for foothold strategies, and aggressive ones aimed at market leadership. The creative designing of entry modes, rather than choosing between textbook models, allows Mines to achieve their objectives in idiosyncratic host environments. We develop suggestions on how to manage entry in emerging economies by drawing from two research projects on FED in emerging economies, which are based on local research and interviews at corporate headquarters (see appendix).
We illustrate the adaptation of strategies to local contexts by comparing the strategies of one litigation enterprise, Scrabbles Breweries, over the past decade in four emerging economies. This longitudinal and comparative perspective within one MEN allows us to focus on the adaptation to the local contexts. The case shows the finer details of the strategy, and provides a powerful illustration of the issues and the dynamics of strategy evolution that may be overlooked in conventional, large dataset analysis.
The brewing industry provides an interesting case because it has gone through a rapid concentration process over the past decade. Still, even in concentrated markets, local and international brands continue to coexist. The parallel development of multiple brands and the structural changes in the industry reflect trends seen in many other food and beverage industries. We focus on four countries that reflect the diversity of Scramblers experiences. Scrabbles entered Poland with a partial acquisition in 1996, and has built a strong position using staged, multiple, and indirect acquisitions.
In Lithuania, Scrabbles took over a local brewery in 1999 and acquired further local brands in a global merger in 2001, thus developing a dominant market position. In Vietnam, Scrabbles entered as early as 1993 with two Jabs that serve both the mass rake and the local premium market. After long perseverance both generate handsome profits. In China, Scrabbles has been a minor player in the sass, but it initiated in 2003 an aggressive strategy of acquisitions in Western China, aiming to capitalize on its emerging economies experience. We develop our arguments as follows. In the next section, we introduce the emerging economy context.
In Section 3, we outline how consumer goods Mines may position themselves in emerging economies. On this basis, we discuss in Section 4 how Mines may use acquisitions and Joint Jabs to access the local resources needed to build their position. Section 5 presents the four case of entry by Scrabbles Breweries, which are set in context in section 6. Section 7 concludes.
The accelerated entry into emerging economies over the past decade has, in part, been driven by opportunities arising from the sheer size of the markets and their impressive economic growth.
Emerging economies offer large markets for consumer goods with a corresponding high growth potential. This applies not only to the special cases of China and India, but also to, for instance, Poland, which is a medium size European market with a population of 38 million. Poland went through a deep recession in the early sass Vietnam has over 80 million people and, in terms of market size, is larger than any European country except Russia. Its per capita income more than quadrupled over the sass. Large, fast growing markets and low factor costs make such countries attractive for international businesses.
Despite their attractiveness, emerging economies typically lag behind in terms of economic development and intricacy of the institutional environment. We define emerging economies as economies with high growth or growth potential, but without the sophistication of the institutional remark seen in Western Europe and North America. Foreign entrants face additional obstacles and risks: Emerging economies are highly volatile due to frequent changes in institutions, industry structure and the macro-economy. Economic growth may be high, but crises are frequent, as the Asian crisis of 1997 demonstrated.
The volatility provides competitive advantage to firms with the strategic flexibility to react to changing circumstances and to grab new business opportunities. The institutional frameworks may require different ways of interacting with business partners and authorities. Institutional voids’ often inhibit the efficiency of markets and increase business risks. Consequently, firms may internalize markets for intermediate goods and services, such as capital and human capital,10 and they may rely to a larger extent on personal relationships to interact with others.
Many of the capabilities needed to compete in emerging economies are confectioneries. Local firms and individuals develop their capabilities to suit the specific context, which may create major barriers to entry. Many industries are highly fragmented, as many small firms compete for a share of the market. With the entry of foreign investors, the market structure may rapidly change, adding to the uncertainty of the market place. Mines have not been deterred by such obstacles, but adapt their strategies. In the next sections, we outline how this can be done, focusing in particular on branding and the acquisition of local resources.
Decision makers first need to clarify their long- term objectives, namely their aspired market position. On this basis, they can then analyses which entry mode would be most suitable to achieve their objectives. In this respect, we first discuss long-term marketing strategies before turning to initial entry
Consumers Emerging economies pose different challenges for marketing than industrialized countries. Typically, incomes are low, labor is relatively cheap, and the customer groups are highly variable.
However, Dewar and Psychotherapy show that, even under these conditions, foreign investors can profitably serve these markets by adapting their strategies to the local context. For instance, low-income groups can be served by the stupefaction production of mass products, emphasizing economies of scale and earning profits through high sales volumes. Low incomes constrain demand, but the corresponding owe wages also create opportunities for people-intensive approaches to marketing. For instance, sales assistants may hand out samples or promotion materials, or support service in bars and restaurants.
Distribution staff may deliver smaller but more frequent shipments to sales outlets. The variability of customer groups in terms of income and regions challenges Mines aiming for large market shares because markets may be highly segmented. Principally, foreign entrants could choose between three types of strategy: Global branding strategy – global brand with little or no adaptation, positioned as remit brand. Local branding strategy – portfolio of local brands, positioned to serve mass markets, and 3. Multi-tier branding strategy – portfolio of global local and brands, positioned to serve different segments of the market. *** Exhibit 1 approximately here *** Exhibit 1 illustrates in which contexts these three strategies may be appropriate. These strategic alternatives also exist in industrialized economies, but in emerging economies the segmentation of markets makes the choice of strategy particularly crucial. In emerging economies, one can expect large margin differences between lobar brands and local mainstream brands. On the one hand, the mass market is highly price sensitive and local competitors may offer standard products at low prices.
On the other hand, the premium segment is the prerogative of the middle and upper classes, which are less price sensitive and very status conscious. The the product portfolio, varies with the structure of the industry and the firm’s own resources and capabilities.
A global brand strategy allows focus on the premium segment. This segment is often small, but attractive because of the substantial purchasing rower of the middle classes in emerging economies, even where average incomes are low. Volumes are typically small, yet margins in terms of profit per unit sold may be large.
The advantages of a global strategy are well recognized. For instance, Squelch points to added value for consumers due to a consistent worldwide brand image, lower costs due to economies of scale, crossbred learning, and attraction and recruitment of ambitious employees. The premium segment is particularly attractive in cultures where status and prestige are highly valued, as in many Asian countries. One is expected to demonstrate status and prosperity as well as appreciation by offering the best product or brand, when bringing gifts, or when going out with business associates.
The prestige of a brand is, therefore, a major factor in the consumers’ perceived value of a product. This phenomenon, known as ‘conspicuous consumption’, implies that demand for the most expensive brand may exceed that for a less pricey premium brand. Brands thus benefit from being perceived as “The Best”. A global brand strategy requires, first and foremost, a recognized global brand, along with the ability to communicate the premium brand’s aloes, and to deliver quality under occasionally adverse conditions. It does not, necessarily require direct investment.
Premium brands may be imported and distributed through local agents, especially if the country of origin form part of their image, and transportation costs are low.
A local brand strategy allows serving markets that are in some way distinct from global markets, or that in themselves are highly fragmented. In particular, a portfolio of local brands may not generate huge sales margins, but it can build market share and lower unit costs through economies of scale and volume sales. One cent earned for each of a thousand units is as good as one dollar earned for each of ten units.
Consumer goods, notably durable goods such as washing machines or motorcycles, may be adapted to the needs and purchasing power of emerging economies by reducing the variety of models and by striping out non- essential product features. At the same time, product features may be adjusted to the needs of emerging markets, such as improving robustness in the presence of unreliable electricity supply and lack of a local service network. Scholars such as Dewar and Psychotherapy point out that such product adjustment may require placement costs, but may reach new consumers and increase economies of scale and thus reduce production costs.
Others, including London and Hart, 14 and Parallax go one step further and advocate the development of new products and business models in a bottom-up fashion through direct interaction with local communities, and by giving local entrepreneurs leverage to adopt products locally. A are low on average, or where markets are regionally segmented as a result of high transportation costs (relative to value added), attachment to local brands, the limited reach of media, and people-intensive distribution networks (as in Vietnam). Success in the mass market requires operational capabilities to support a low cost strategy.
In this segment, foreign entrants would compete with local firms that produce at low costs, are familiar with intricacies of the market, well networked and used to flexibly adjust to a volatile economy and to frequent changes in rules and regulation. Entrants thus need competences and business practices in managing production and marketing under emerging economy conditions, such as strategic flexibility and networking capabilities. 1 5 Such operational knowledge may be transferable between merging economies, such that Mines share experience across subsidiaries to develop unique capabilities for supporting local brand strategies.
Firms with strong operational capabilities but without internationally-known brands may opt for this type of strategy (Exhibit 2).
Foreign entrants can combine global and local brands to achieve synergies between them. This is especially appropriate in markets that are highly segmented, as is common in emerging economies. ‘Multi-tier’ strategies Join global and local brands and may thus solve the dilemma of either not attaining absentia market share or not capitalizing on the global brand value. Acquired or newly developed local brands cater to the medium or low-price segments of the market, while global brands aim at the upper end. Synergies arise especially in distribution channels through economies of scope in local production and logistics, and may strengthen bargaining power visit-Г-visit suppliers and retailers. Parallel coverage of multiple market segments may provide some protection against market fluctuations, and, the brand value of a local brand may be enhanced through its association with the global brand.
For instance, Squelch points out that even Coca- Cola has launched a wide portfolio of local brands on the back of the distribution channels of its global brand. At the same time, separate branding may protect the global brand from adverse reputation effects, such as low quality of local production. A crucial advantage of a multi-tier strategy in an emerging economy context is the ability to introduce and promote the global brand if and when the market is ready. With economic development, demand for premium brands is likely to pick up – especially for those brands already known to aspiring new consumers.
The global brand may be pushed through the existing channels of the local brands, which provides a flexible set-up to react to market trends. Early movers may then earn high returns on their investment in a premium brand. However, multi-tier strategies also carry additional costs and risks. Different market segments may require different competences and organizational cultures. This, in turn, creates operational challenges for firms aiming to integrate business units with different imperatives, management of branded pharmaceuticals may require different competences than those required for generic pharmaceuticals.
Moreover, an association with a weak local distribution system could weaken a global brand. This would be of particular concern for consumer durables, such as cars or televisions, for which premium customers expect a higher level of associated services. For such products, sharing retail outlets and after-sales service units for different brands may be less advisable. This is, however, of 9 less concern for fast moving consumer goods, such as beer, because retail outlets and pubs usually prefer to offer a range of different brands.
A multi-tier strategy has to be supported by an appropriate combination of resources. As illustrated in Exhibit 2, firms with global brands and the capability to support this brand in remote corners of the world would choose a global strategy (quadrant l). Firms with expertise in operating and upgrading production and marketing in emerging economies but without a global brand can expand by building local brands (quadrant II). A multi-tier strategy may be most attractive in terms of market reach, yet it requires the MEN to possess crucial resources for both segments (quadrant Ill).
They need a global brand and the capability to market and deliver this brand with global quality standards, as ell as operational capabilities for competing with local competitors familiar with the context and producing at low costs. On the other hand, if a firm has neither a global brand nor operational capabilities that are transferable to emerging economies (quadrant ‘V), the company may have little to gain by investing in emerging economies. A foreign entry would require it to develop a brand and capabilities ‘along the way, which is a highly risky strategy. Implementation: Acquisition of Local Firms and Resources How can MEN build capabilities for operating in emerging economies, and compete on the basis of local brands? A crucial element in implementing an emerging economy strategy is the acquisition of resources that are controlled by local firms. Yet, take-over of local firms are inhibited by idiosyncrasies of emerging economy contexts, including regulatory constraints and scarcity of potential acquisition targets. Thus, decision makers have to think creatively how to design their entry strategy.
They are not limited to the traditional set of entry modes acquisition, Greenfield or Joint venture OVA) as much of the academic literature implicitly assumes. Many obstacles may best be overcome by customizing a mode of entry to the local context, rather than opting for a second-best mode. Entrants develop idiosyncratic forms of acquisition, such as staged, multiple, indirect and Brownfield acquisitions, as well as Jabs to overcome the aforementioned obstacles in emerging economies (Exhibit 3). These allow for new variations in the key dimensions discussed in the literature, namely contracts and access to resources. Insert Exhibit 3 approximately here.
Entrants aiming to penetrate a market would look for acquisition targets with access to or control of key points in the distribution channel, ND knowledge of the political and institutional framework. Firms pursuing global brand strategies would, in particular, seek access to distribution channels that allow them to control the quality of their products. In contrast, those pursuing a local brand strategy or multi-tier strategies require a fuller range of local assets, including brand names and knowledge of local consumer behavior.
Moreover, in some contexts, cooperation with a local firm may help building political goodwill. Technology of local firms may as such not attract market-seeking investors, but the ability of the workforce to learn may be important. The employees of the relatively advanced local firms may be best qualified to benefit from training and to adopt new technologies and business practices. Yet, this broad range of resources may rarely be available in a single firm, such that suitable targets are scarce. Even if a suitable target can be identified, an acquisition may be inhibited by obstacles specific to emerging economies.
The resource endowments of local firms are often poor, and their technological upgrading and organizational integration may require considerable additional investment. Moreover, the relevant capital market institutions may not be well developed, which increases the costs of evaluating, negotiating and contracting an acquisition. To overcome these obstacles, foreign investors can choose more or less ‘aggressive’ entry strategies (Exhibit 4). Foothold entry strategies Some entry modes serve primarily to establish a foothold in a market.
This includes partial acquisitions and Jabs, which create options for learning and for gradual expansion without a major upfront resource commitment. In volatile environments, the flexibility to react to positive changes in timely manner may be an important competitive advantage. A low level of involvement provides a platform from which to expand if the business develops favorably, while at the same time the flexibility not to commit further resources if prospects turn out to be less promising remains. However, entrants gain only limited control and risk being left behind by more aggressive competitors committing more resources. Traditionally many Mines establish a new operation Jointly owned with a local firm, a JP. This provides a foothold, especially where legal constraints inhibit acquisitions, ND avoids having to take responsibility for an existing local firm with major restructuring challenges. In a JP, only selected resources are transferred to the new organization, leaving the core businesses of both partners separate.
However, the ownership arrangement is inherently unstable and potential conflicts between the are common areas of conflict between parents of a JP. For instance they may disagree on the relative priority of local and global brands in the marketing budget. Serious conflicts often arise when a foreign investor wishes to expand and invest in building the global brand. The local partner may be unable or unwilling to contribute fresh resources for an aggressive growth strategy, but at the same time object to capital increases that would dilute the local’s equity share and influence.
Thus, Jabs require less commitment, but may lock the investor into a partnership that later limits growth options. Forward looking JP founders would anticipate such conflicts when drafting the JP contract, for instance by stipulating conditions under which one partner may take over the JP. Like Jabs, “staged acquisitions” require limited initial investment, yet this investment goes into an existing firm. At the outset, staged acquisitions are partial acquisitions in which the foreign investor has the option to acquire full control later.
The initial role of the foreign investor varies considerably depending on the contract accompanying the entry. In the case of prevarication, the investor often gains managerial control, but is subject to formal and informal constraints on radical restructuring. The investor may thus obtain access to local distribution channels but only limited control over the positioning of local brands (or their possible discontinuation). The increase of the foreign investor’s equity stake may be pre- leaned at the outset or be initiated in response to changes in the environment, particularly changes in FED regulation.
Partial acquisitions are potentially subject to conflicts that require compromises among shareholders. The nature of potential conflicts varies with the identity of confers. In contrast to Jabs, they normally do not draft a contract with clearly articulated common objectives, such that conflicts are more likely. On the other hand, the buy-out of the remaining shareholders may be easier, especially if they do not have a strategic interest in the firm. Why do investors in emerging economies accept to share control?
Often, the decision is a matter of limited opportunities, as the owner may be unwilling to sell outright. This is common for both prevarication agencies and family-owned businesses, the most frequent ‘sellers’ of enterprises in emerging markets. However, the continued involvement of the previous owner may also be advantageous for the acquirer. If the state or an influential local conglomerate shares the risks as well as the profits of the business, they may also help alleviate potential adverse interference by restaurants in less predictable institutional environments.