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Going GlobalLessons from Late Movers

132 HARVARD BUSINESS REVIEW March-April 2000

Contrary to popular wisdomj companies from the fringes of the world economy

can hecome glohal players. What they need is organizational cofifidence, a clear

strategy, a passion for learning, and the leadership to bring these factors together.

^ V

by Christopher A. Bartlettand Sumantra Ghoshal

IN HIS AUTOBIOGRAPHY, former

South African president Nelson

, Mandela recalls his dismay

when he boarded an airplane and

found that the pilot was African.

With shock, he realized his reaction

was exactly what he had been fight-

ing against all his life. Mandela was

discussing racism, but the same in-

voluntary reactions surface in com-

merce. Consider labels such as

"Made in Brazil" and "Made in

Thailand." Someday they may be

symbols of high quality and value,

but today many consumers expect

products from those countries to be

inferior. Unfortunately, that percep-

tion is often shared by managers of

tbe local companies that are striving

to become global players.

133

Going Global; Lessons from Late Movers

That's just one reason why companies from pe-ripheral countries find it so difficult to competeagainst established global giants from Europe,Japan, and the United States-the triad that domi-nates global commerce. And when they do com-pete, the experience of emerging multinationals of-ten reinforces their self-doubt. Consider ArvindMills, an Indian garment manufacturer that in themid-1990s found a niche supplying denim to lead-ing Western apparel companies. As Arvind's over-seas sales grew, its stock soared on the BombayStock Exchange, and the company's CEO confi-dently declared that the company was well on itsway to becoming a powerful global player. Butwithin a couple of years, Arvind had become a vic-tim of the fickle demands of the fashion businessand the cutthroat competition among offshore ap-parel makers battling for the shrinking U.S. jeansmarket.

Stories such as Arvind's are told and retold inmanagement circles. The moral is consistently neg-ative. Companies from developing countries haveentered the game too late. They don't have the re-sources. They can't hope to compete against giants.Yet despite the plausibility of such stories, we be-lieve they are condescending and represent thecounsel of despair. Indeed, there is plenty of evi-dence of an altogether different story. After all,companies like Sony, Toyota, and NEC trans-formed the cheap, low-quality image of Japaneseproducts in little more than a decade. Is that type ofturnaround still possible? To find out, we looked atcompanies that, unlike Arvind, have successfullybuilt a lasting and profitable international businessfrom home countries far from the heart of the globaleconomy.

We studied 12 emerging multinationals in depth.They operate in a wide range of businesses, but theyare all based in countries that have not producedmany successful multinationals-from large emerg-ing markets like Brazil to relatively more prosper-ous yet still peripheral nations such as Australia tosmall developing countries like the Philippines.And while these companies are distinguished bystrategic, organizational, and management diver-sity, they share some common traits. Most notably,each used foreign ventures in order to build capabil-

Cbristopber A. Bartlett is the Daewoo Professor of Busi-ness Administration at Harvard Business School inBoston. Sumantra Ghoshal is the Robert P. Bauman Pro-fessor of Strategic Leadership at London BusinessSchool.

To discuss this article, join HBR's authors and readers inthe HBR Forum at www.hbr.org/forum.

ities to compete in more-profitable segments oftheir industry.

The evolution into more-profitable product seg-ments can be clearly tracked on what we call thevalue curve. All industries can be seen as a collec-tion of product market segments; the value curve isa tool used to differentiate the various segments.(For an example, see the exhibit "The Pharmaceuti-cal Industry's Value Curve.") The more profitable asegment, tbe more sophisticated are the capabili-ties needed to compete in it-in RfiJD, distribution,or marketing. The problem for most aspiring multi-nationals from peripheral countries is that they typ-ically enter the global marketplace at the bottom ofthe value curve-and they stay there. This is trueeven when a company's internal capabilities exceedthe demands of a particular segment. Arvind Mills,for example, expanded abroad with commodity-like products even though it competed successfullyin higher-value segments at home. And it's not thatcompanies don't see the profitability of value-addedproducts; the performance of companies abovethem on the value curve is usually quite evident.Basically, their failure is due to a paralysis of will.Managers either lack confidence in their organiza-tion's ability to climb the value curve or they lackthe courage to commit resources to mounting thatchallenge. Often, as Nelson Mandela's memoir illus-trates, they are crippled by a vision of themselves assecond-class citizens.

A Model of SuccessThe Indian pharmaceutical company Ranbaxy isone of the success stories. For 18 years after itlaunched its export business in 197s, Ranbaxy wastrapped at the bottom of the pharmaceutical valuecurve. Even though it had developed advancedproduct and process capabilities in its home mar-ket, when Ranbaxy decided to go overseas it optedto produce and sell bulk substances and intermedi-ates in relatively unsophisticated markets. Becausegross margins were between 5% and 10%, the addi-tional revenue generated by the foreign businessdid not even offset the added costs of internationalsales and distribution. Management justified thenegative returns by celebrating the prestige associ-ated with being a multinational and making vaguepromises about using overseas contacts and experi-ence to upgrade the business.

In 1993, Ranbaxy's approach to internationaliza-tion changed fundamentally. Parvinder Singh, thechairman and CEO from then until his death in1999, challenged the top management team withhis dream of transforming Ranbaxy into "an inter-


Going Global: Lessons from Late Movers

The Pharmaceutical

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al a

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ompl

exity

lnol

ctin

gTe

chM

arke

Low

Intermediates andbulk substances

•

•

2%-12%

Industry's Value

Commoditygenerlcs

— - "

12%-20%

Conventionaldosage forms

20% - 30%

Gross (

Curve

Value-addedand branded

yenerics

J

^ ^

30% - 40%

Vlargin

OveF-thecoimterand new

drug deliverysystems

y

40%-60%

New /chemical /entity and /

drug /discovery /

7

60%-100%

national, research-based pharmaceutical company."When his colleagues questioned how a small Indiancompany could compete with the rich giants fromthe West, he responded, "Ranbaxy cannot changeIndia. What it can do is to create a pocket of excel-lence. Ranbaxy must be an island within India."

Once there was a shift in mind-set, the strategywas straightforward. The eompany moved into thehigher-margin business of selling branded genericsin large markets like Russia and China-a changethat required building new customer relationships,a strong brand image, and different distributionchannels. Ranbaxy then entered the U.S. and Euro-pean markets, in which the company needed to meetmuch more stringent regulatory requirements. Butby using its growing international knowledge andexperience to develop new resources and capabili-ties, Ranbaxy established a profitable internationalbusiness that accounted for more than half of its$250 million in revenue in 1996.

Not content with that, Ranbaxy has already be-gun the long, slow climb to the upper regions of thepharmaceutical value curve. Thanks to consistentlyinvesting 4% to 6% of its revenue in R&D, thecompany has built a world-class laboratory staffedby 250 scientists. Pushed by Singh's persistentquestion-Why do we say that new drug discovery

is the exclusive preserve of the United States andEurope?-these scientists arc committed to devel-oping a $500 million drug before 2003. They cannotspend $300 million in R&JD to develop the drug, theaverage expense in the West, but they believe theycan cut that figure by a factor of four or five. "Wehave significant cost advantages in R&D, and we areprepared to invest $100 million," says f.M. Khanna,Ranbaxy's head of R&D.

Ranbaxy's growth path is shared by tbe othercompanies in our study. They all faced and over-came tbe same core challenges as they attempted togo global. Their immediate challenge was to breakout of the mind-set that they couldn't competesuccessfully on the global stage. Once freed of thatbtirden, they had to find strategies in which being alate mover was a source of competitive advantagerather than a disadvantage. Finally, they bad to de-velop a culture of continual cross-border learning.Winning companies enjoyed global success becausethey learned how to learn from the constant flow ofnew demands, opportunities, and challenges thatinternational competition brings. This is quite aleap for most emerging multinationals; the abilityto see globalization as more than a path to newmarkets or resources is rare in all but the mostsophisticated global companies.

HARVARD BUSINESS REVIEW March-April 2000 135


Breaking Out of theMarginal Mind-SetLet's take a closer look at the psy-chological factors that hold backmost companies and the ways ouremerging multinationals dealtwith them. Companies from pe-ripheral countries can fall intoseveral traps, which we call liabil-ities of origin. First, some compa-nies feel as though they are lockedin a prison of local standards be-cause of the gap between technicalrequirements and design normsat home and world-class stan-dards abroad. If demand at homeis strong, managers then can rea-sonably postpone the investmentsneeded to comply with interna-tional standards. This insidioussituation causes potential multi-nationals to duck the challenge ofgoing abroad.

Some companies fall into a sec-ond trap. Even though their prod-ucts and services are already up tosnuff, because of the peripherallocation, management is eitherunaware of the company's globalpotential or too debilitated by self-doubt to capitalize on it.

Finally, there are a few com-panies for which the liability oforigin derives from a limited ex-posure to global competition,leaving them overconfident intheir abilities or blind to poten-tial dangers. Unfortunately, thereare no quick solutions to any ofthese psychological barriers. Butour emerging multinationalsstarted to overcome them by cre-ating a push from home and a pullfrom abroad.

Push from home. There are ba-sically two ways for a company tocreate a push from home. In thefirst, a moment of truth stimu-lates the initial steps down the 'long path toward internationalization. This is par-ticularly the case for companies that are so blindedby their domestic success that they fail to see thattheir origins present a liability. Therefore, manage-ment's greatest challenge is to shock or challenge

Navigating the PC Industry's Value Curve

The drive up the value curve sometimesrequires a company not Just to shiftprodua market segments but also tomigrate to different points in the supplychain. Consider Acer, the Taiwanesecompany that started in 1976 as anelectronic components importer andbecame the v̂ rorld's number threemanufacturer of personal computersin just two decades.

As the PC market matured, Acerused its growing globai presence tobuild capabilities at both ends of thesupply chain, where the margins arehigher than in the assembly business,which was its early focus. Acer learnedfrom its exposure to globai technologyand best manufacturing practices,which helped the company moveupstream into manufacturingmotherboards, peripherals, and centralprocessing units. In 1989, Acerpartnered with Texas Instruments toproduce semiconductors. Nine yearslater, it bought out Tl's share.

Downstream, Acer's regional businessunits took over local assembly, startedsourcing locally, opened new channels,and invested in the global brand thatthe company felt was key to freeing itfrom the low-margin OEM business.CEO Stan Shih calls this reorientationhis "smiling curve,""Assembly meansyou are making money from manuallabor. In components and marketing,you add value with your brains."

Shih's commitment to push hiscompany to add value through the"smiling curve" saved Acer from the fateof dozens of other Taiwaneseelectronics suppliers that becamecaptive suppliers of OEM goods tomajor computer companies. More thanthat, it has led Acer's continuingevolution in the global market.Thecompany is now developing softwareand Internet businesses, which itbelieves will be the high-end value-added segments that will drive the nextstage of Acer's global expansion.

Stan Shih's Smiling Curve

ValueAdded

V— Software

V - CPU

V - DRAM

V - LCD

\ - ASIC\ - Monitor

^ ^ Motherboard

> ^Components

Loca) assembly- 1 — - ^

Assembly

E-commerce —

Distribution -~j

Marketing -f

Local /sourcing - /

Distribution

Recognizing that Acer's focus on assembling PCs was keeping the company in the leastprofitable segment of the market, CEO Stan Shih decided to move up the value curveby developing capabilities in components and distribution. Succeeding in componentsrequired strong technology and enough manufacturing skill to produce economies ofscale. Succeeding in distribution required a solid brand, established channels, andeffective logistics. Acer has built both.

the company to push it from its nest. It was justsuch a moment of truth that enabled the Korean gi-ant Samsung to turn around its international salesof consumer electronics. Less than a decade ago,Samsung was struggling to expand into overseas



markets, even though its products were technologi-cally equal to its competitors' offerings. The prob-lem was that most of Samsung's managers wereunaware of or denied the existence of negative con-sumer perceptions abroad, largely because Sam-sung's products were so well regarded at home.

To force the company to deal with the problem,chairman Kun-Hee Lee flew ioo senior managers tothe United States to show them how Samsung'sproducts were treated. The visit was traumatic.Prominently displayed in storefronts were Sony,Bang & Olufsen, and the products of other presti-gious companies. Lined up behind them werebrands such as Philips, Panasonic,Toshiba, and Hitachi. In the back ofthe stores, frequently with big "bar-gain sale" stickers on them, were theSamsung TVs and VCRs, often with alayer of dust dulling the high-qualityfinish that the company had investedtrillions of won to achieve. As the distraught execu-tives joined their chairman in dusting their prod-ucts with their handkerchiefs, he spelled out whatall of them could clearly see: they had a lot of workto do to change overseas consumers' expectations.That moment of truth had an enduring impact. Theexecutives initiated a series of actions that eventu-ally led to a major turnaround of Samsung's globalconsumer electronics business.

The second way to create a push from home re-quires a leap of faith more than a shock of recogni-tion. These leaps can be dramatic, and they are al-ways risky, like performing on a trapeze without anet. Some CEOs, for example, demonstrate theircommitment to globalization by investing far aheadof demand, even if doing so reduces the company'sresponsiveness to its successful home market.

Consider Thermax, a domestic Indian manufac-turer of small boilers. Thermax had developed aradically different design for its boilers, which re-duced their size by a third. Clearly, the new productcould be a winner in the Indian market, where de-mand for such products was strong. But designingthis new boiler to Indian specifications wouldmake it virtually unsellable overseas. To succeedglobally, the company not only had to meet thehighest international technical standards but alsohad to develop a fundamentally different design con-cept. Overseas markets demanded sophisticated,and more expensive, integrated systems that en-abled quick on-site installation, whereas India'slower labor costs allowed domestic contractors totake on more of the installation task themselves.Although the Indian market accounted for almost80% of Thermax sales and roo% of profits, manag-

ing director Ahhay Nalwade nonetheless decided todesign the boiler for international markets. He be-lieved the Innovation gave the company one goodshot at breaking into the European and NorthAmerican markets. He was right. Today Thermaxis the sixth-largest producer of small boilers in theworld.

Pull from abroad. Pushes from home are indis-pensable, but if companies are to use internationalexpansion to move up the value curve, they alsoneed to invest in the management capabilities oftheir overseas units to provide pull from abroad.Simply sending home-office managers with a vague

Because of a company's peripheral location,its management may be unaware of itsglobal potential.

charge to explore opportunities and open the mar-ket rarely achieves the objective; organizationsneed an engaged trading post, not just a passive lis-tening post. Companies need offshore champions-often senior executives from the target market-who can provide the young, overseas organizationwith credibility and confidence, both internallyand externally. Strong and credible voices fromabroad can greatly increase the likelihood thatemerging multinationals will have the courage totransfer organizational assets, resources, and influ-ence outside their home country.

Natura, a direct-sales cosmetics company thathas been named Brazil's most admired company forthree consecutive years, learned that lesson thehard way. Although Natxira has defended its strongmarket position in Brazil against international gi-ants like Revlon, Estee Lauder, P&G, and Shiseido,it has failed to leverage its enormous product devel-opment and marketing strengths abroad-even innearby markets like Argentina, Chile, and Peru.Absorbed by 40% to 50% growth at home, the com-pany was unwilling to assign heavyweight man-agers to the new market opportunities. Abroad, itrelied on unsupported midlevel expatriates andhastily hired outsiders who failed one by one. Theydidn't have the credibility needed to win top man-agement's attention or the clout required to get theresources and the support vital to building a viablebusiness abroad.

By contrast, Ranbaxy's Singh was committed toinvesting in overseas markets well ahead of de-mand. He realized that to do this he would haveto create an organization in which managers fromother parts of the world had a seat at the table on



key corporate decisions. He divided the world Intofour regions, of which India was just one, eventhough its sales and profits were four times largerthan the other three combined. Equally strongmanagers were assigned to each region. For exam-ple, although the size of Ranhaxy's European opera-tion could not justify it, Singh hired a senior Britishexecutive from a leading pharmaceutical multina-tional to head the region. This executive's clear andunwavering helief in Ranbaxy and his commitmentto huilding its European husiness hccame a power-ful pull from ahroad, helping the Indian-hased phar-maeeutieal company helieve it could compete indeveloped Western markets.

Devising Strategies for Late MoversOnce freed from the gravitational pull of its domes-tic market, the next major challenge for the emer-gent multinational is to choose a strategy to enterthe global marketplace. On the face of it, the disad-vantages of heing a late entrant seem overwhelm-ing. Management thinkers concluded long ago thatthe dominanee of today's glohal giants is rooted intheir first-mover status. Coca-Cola, for example,was the first soft-drink company to huild a rccog-nizahly glohal hrand. Moving first allowed Caterpil-lar to get a lock on overseas sales channels and ser-vice capahilities. Being a first mover enahledMatsushita to establish VHS as the glohal technicalstandard for vidcocassette recorders.

There are, however, some distinct advantages toturning up late for the global party. The emergingmultinationals we ohserved typically exploitedlate-mover advantages in one of two ways. Somestarted hy henehmarking the estahlished glohalplayers and then maneuvered around them, often

On the face of it, the disadvantages ofheing a late entrant seem overwhelming.But there are distinct advantages toturning up late to the glohal party.

hy exploiting niches that the larger companies hadoverlooked. Other companies adopted an alterna-tive, though riskier, strategy. They used their new-comer status to challenge the rules of the game,capitalizing on the inflexihilities in the existingplayers' husiness models.

Benchmark and sidestep. Managers of small com-panies with limited international exposure fearthat they will be ill equipped to faee establishedglohal competitors in unfamiliar foreign environ-

ments. Yet in today's global market, you don't haveto go ahroad to experience international competi-tion. Sooner or later the world comes to you. As aresult, emerging multinationals can learn how tocompete against the players in foreign markets sim-ply by adapting and responding to those players asthey enter the home market. That's exactly whatthe Philippines-based, fast-food chain JoIUbee did.When the U.S. giant McDonald's began openingstores in Manila in 1981, few people believed Jol-libee's tiny 11-store chain would survive. But CEOTony Tan Caktiong and his management team de-cided to use the entry of McDonald's as a trainingground to bring their young chain up to world elass.

Going head-to-head against the experienced glohalcompany gave Jollibee's managers a firsthand viewof the sophisticated operating systems that allowedMcDonald's to control its quality, costs, and serviceat the store level. The lesson came at an ideal stagein the small chain's development, when the needfor robust operating controls was the major con-straint to further expansion. And what better modelto learn from than a company whose refined sys-tems control the day-to-day operations of thou-sands of stores worldwide? Indeed, it was on thestrength of its improved operating systems that Jol-libee established a network of 65 domestic stores by1990-far outdistancing the expansion of McDon-ald's in the Philippines.

But Jollihee's management did not just copy Mc-Donald's,- it also looked for ways to innovate. As itgained a hetter understanding of McDonald's busi-ness model, JoUibee started to recognize the gaps inits strategy. The U.S. company's standard productline and its U.S.-dominated decision processes didnot easily incorporate loeal taste preferences. Jol-lihee offered a more tailored m e n u - a slightlysweeter hamburger, an innovative chicken product,a kid-oriented spaghetti plate-to differentiate it-self from the U.S. giant. The combination of Jol-libee's new, efficient stores and consumer-sensitivemenu earned the loyalty of existing eustomers andallowed JoUihee to expand the fast-food market tonew consumers.

The insights born of having survived McDonald'sarrival in the Philippines taught Jollibee how itcould move abroad. Knowing that it needed to pro-vide for local tastes, the company developed the Jol-limeal, a riee-based dish that could he adapted tothe dominant local cuisine of the nearby marketsthat Jollibee began to enter in 1986. Jollibee re-spected McDonald's enough that it did not want totake on the global giant head-to-head in its firstoverseas forays. Instead, it started with the smallermarkets where fast food was not yet well estab-



lished, such as Brunei, Guam, and Vietnam. Theseearly ventures helped Jollibee refine its strategyand learn about the prohlems of managing offshorefranchises.

As Jollibee grew, it recognized that there wasplenty of spaee for its differentiated products andthat it had the capahUities to sur-vive in larger and more compet-itive markets such as Indonesiaand Hong Kong. Its niche prod-ucts such as the nasi lema, a riceand coconut milk dish sold in In-donesia, and the chicken-mush-room rice offered in Hong Kongmoved Jollibee heyond the in-creasingly commoditized prod-uct segments of hamburgers andfried chicken. By the early 1990s,

In today's globalmarkets, you don't haveto go abroad toexperience internationalcompetition. Sooneror later the worldcomes to you.

JoUibee had established 24 overseas stores in tencountries, mostly in Southeast Asia and the MiddleEast. Though hardly on the scale of McDonald'snetwork of more than 3,000 overseas outlets in al-most 100 eountries, Jollibee's operations nonethe-less formed a sound hasis for building a glohal fran-chise. In 1998, the company felt ready to take onthe most demanding fast-food market in the world.Today, its first San Francisco store is performingat almost 50% ahove forecast levels, and two newstores have just opened. And Jollihee plans to rollout new stores in 17 other locations in Californiaover the next 18 months.

Confront and challenge. JoUihee's success illus-trates how a late entrant can benchmark and adaptthe business models of its competitors. A more rad-ical strategy is to introduce new business modelsthat challenge the industry's established rules ofcompetition. Though risky, this approach can bevery effective in industries deeply embedded withtradition or comfortably divided among an estab-lished oligopoly. The typical husiness model inthese industries has become inflexihle. Among thecompanies we studied, the one that took advantageof others' inflexibilities the hest was BRL Hardy,an Australian wine company that defied many ofthe well-entrenched traditions of internationalwine production, trading, and distribution-despitethe fact that its home country produces only 2%of the world's wine.

From a 1991 base of $31 million in export sales-much of it bulk for private lahels and the rest a pot-pourri of bottled products sold through distrib-utors-Hardy huilt its foreign sales to $r78 millionin 1998, almost all of it directly marketed as brandedproducts. Managing director Steve Millar describesthe insight that triggered this turnaround: "We he-

gan to realize that for a lot of historical reasons, thewine business-unlike the soft-drinks or paekaged-foods industries-had very few true multinationalcompanies and therefore very few true globalhrands. There was a great opportunity, and we wereas well placed as anyone to grab it."

Millar was alluding to the in-flexibility of the European prac-tice of laheling wines by region,subregion, and even village-theFrench appellation or the Italiandominazione systems are classicexamples. A vineyard could befurther categorized according toits historical quality classifica-tion such as the French premiergrand cru, the grand cru, and so

^^~^^^^~~~ on. The resulting complexity notonly confuses consumers but also fragments pro-ducers, whose small scale prevents them fromhuilding brand strength or distribution capability.This created an opportunity for major retailers,such as Sainsbury's in the United Kingdom, to over-come consumers' confusion-and capture morevalue themselves - by buying in bulk and sellingunder the store's own label.

For decades, BRL Hardy's international businesswas caught in this trap. It distributed its Hardy la-bel wines to retailers through local agents and soldbulk wine directly for private labels. But Millar's in-sight gave the company a way out, if it was willingto change the rules of the game on both the demandand supply sides. First, new staff was appointed andnew resources allocated to upgrade overseas salesoffices. Instead of simply supporting the sales activ-ities of distributing agents, they took direct controlof the full sales, distribution, and marketing. Theirprimary objective was to establish Hardy as a viableglobal brand. The company's supply-side decisionwas even more significant. In order to exploit thegrowing marketing expertise of these overseasunits. Hardy encouraged them to supplement theirAustralian product line hy sourcing wine fromaround the world. Not only did Hardy offset thevintage uncertainties and currency risks of sourc-ing from a single country, it also gained clout in itsdealings with retailers. By breaking the tradition ofselling only its own wine. Hardy was able to buildthe scale necessary for creating strong brands andnegotiating with retail stores.

The advantages have been clear and powerful.The company's range of wines-from Australia aswell as France, Italy, and Chile-responds to super-markets' needs to deal with a few broad line suppli-ers. At the same time, the scale of operation has



supported the brand development so vital to pullingproducts out of the commodity range. Results havebeen outstanding. In Europe, the volume of Hardy'shrands has increased i2-fold in seven years, makingit the leading Australian wine hrand in the huge UKmarket, and number two overall to Gallo in theUnited Kingdom. And branded products from other

seas managers from the highly successful Philip-pines fast-food organization. Then he systemati-cally differentiated his operating systems, store de-sign, menus, advertising themes, and even thecompany's logo and slogan. Despite his enthusiasmand energy, Jollibee's international sales struggledand losses mounted. Eventually that manager was

The glohal marketplace is information based. Knowing how to learn is thecentral skill that allows a company to move up the value curve.

countries have grown to represent about a quarterof its European volume. Hardy has evolved from anAustralian wine exporter to a truly global winecompany.

The company's new strategy and capabilities arevisible in its recent introduction of a branded winefrom Sicily called D'istinto. Under a supply agree-ment and marketing program initiated by BRLHardy Europe, in its first year this product has sold200,000 cases in the United Kingdom alone-an ex-ceptional performance. As the hrand is introducedto the rest of Europe, North America, and Australia,Hardy expects sales to top a million cases by 2003.

Learning How to LearnAsk most managers why they are steering theircompanies into international expansion and theywill talk about increasing sales or securing low-costlabor and raw materials. Important as those objec-tives are, they do not ensure a company's successabroad. Tbe global marketplace is informationbased and knowledge intensive. To survive in thisenvironment, you must know how to learn: it is thecentral skill that allows a company to move upthe value curve. Yet all learning requires tuition,and every company faces the risk that the effort in-volved in acquiring new capabilities may draw offtoo many vital resources and threaten the domesticbusiness. The trick is to protect the past whilebuilding the future.

Protect the past. The first rule of companies thatwant to learn is to fully exploit the resources andcapabilities that have provided competitive advan-tage to date. This is a simple notion, yet in thequest for global position, too many eompanies be-come so focused on where they are going that theyforget where they are coming from. In the earlystages of Jollibee's expansion, for example, an ag-gressive international division manager fell intothe trap of trying to reinvent the company's busi-ness. By constantly emphasizing the differences ofoverseas markets, he deliberately isolated his over-

replaced with someone more willing to build on ex-isting expertise.

The new manager took a few simple steps thatwere crucial to the company's subsequent interna-tional growtb. First, he broke down the barriersbetween the international and domestic organi-zations and began building relationships thatacknowledged his respect for their success and de-pendence on the home country's expertise. For ex-ample, international managers now train in thePhilippines operations, learning from that organi-zation's experience and making useful supportcontacts as they do. They also have given up tryingto manage all their own financial and operationsreporting systems, relying instead on the efficienthome market staff. And when major overseas ap-pointments eome up-as one did to manage the keyChina and Hong Kong operations-the interna-tional group now feels comfortable drawing on thebest and brightest from the Philippines-in thiscase the domestic VP of operations-rather thantrying to staff from international ranks.

This sort of close cooperation between the parentcompany and its overseas subsidiaries establishes adynamic of mutual learning. In Jollibee's ease, thedomestic organization's openness and exposure tointernational developments has allowed it to bene-fit from some of the adaptations and adjustmentsmade to accommodate different situations abroad.For example, even through it is only a year old, tbeU.S. operations have already located chicken andbeef suppliers for its restaurants in Southeast Asia,and the Philippines stores have just launched acheesy bacon-mushroom sandwich originally de-veloped for the U.S. market. So the operation thatstarted by teaching its international managers hasended up learning from them. Such cross-pollinationof ideas is key if emerging multinationals are tocompete successfully with the giants they take on.

Build the future. Entering a new market success-fully usually requires considerably more than sim-ply tweaking the home-market formula. Oftencompanies lack the expertise needed to tailor the

140 HARVARD BUSIKESS REVIEW Mardi-April 2000


product or strategy to the new environment. Somany emerging multinationals try to take a short-cut to learning by entering into a partnership with aforeign company. But while some of these interna-tional partnerships become successful long-termventures, more fall apart due to an asymmetry ofinterests or a shift in the partners' power balance.When that happens, the emergent multinational asa new and small player is often left at a serious dis-advantage.

Consider the situation faced by VIP Industries,India's largest luggage company and the world'ssecond-largest producer after Samsonite of moldedluggage. When it entered the UK market, VIP formeda marketing partnership with a local distributorthat promised access to the country's largest retail-ers. A breakthrough came when the distributor,with VIP's help, won the franchise to establish aspecialty luggage department in each of Dehen-ham's 75 stores nationwide. VIP invested heavily instaff training for the specialty departments, and itwas rewarded with a 60% share of Debenham'shard luggage sales. Yet when Samsonite offeredVIP's distributor exclusive rights to its revolution-ary Oyster n model, the local agent switched alle-giances with hardly a thought. With no direct in-vestment in its own local sales and marketingcapabilities, VIP was powerless to respond.

In theory, companies can sidestep the disadvan-tages of partnering by buying the necessary capabil-ities. But that can create problems of its own. Thatwas the mistake that Hardy made when it eommit-ted to international expansion. In the course of justtwo business trips to Europe, the company's man-agement had snapped up two established Londonwine merchants, a large French winery and estate,and a historic Italian vineyard. Hardy believed theacquisitions would provide an asset base and knowl-edge pool to broaden its product sources and in-crease its marketing clout. But the challenge of si-multaneously developing expertise in Italian andFrench wine making as well as English marketingproved overwhelming and soon placed huge finan-cial and management strains on the company.

After that false start. Hardy realized that in inter-national business new capabilities cannot simplybe installed; they must be developed and internal-ized. That's why, despite acute financial pressures,the company rejected a tempting opportunity torapidly expand its UK market volume by supplyingwine for a leading grocery chain's private label. In-stead, it opted for the more difficult task of buildingHardy's own brand image and the marketing anddistrihution capabilities to support it. That has re-quired considerable investment in new personnel

and training, as well as a major reorientation of in-ternal culture.

In 1991, Christopher Carson, an experienced inter-national wine marketer, was appointed managingdirector of the company's UK operations. Over thenext 18 months, Carson pruned three-quarters ofthe items in the fragmented product line, replacedhalf his management team, and began building aculture around creativity and disciplined execu-tion. Within three years, he had not only quadru-pled sales of Hardy hrands but also developed one ofhis imported wines from Chile into the biggest-sell-ing Chilean brand in the United Kingdom. Hardy'srevenues and profits have amply rewarded this in-vestment, and the organization has developed aworldwide pool of knowledge and expertise thatbenefits the entire company. Carson, for example,has become the eompany's acknowledged expert instructuring sourcing partnerships and marketingoutsourced wine brands. After building experiencenegotiating the Chilean partnership, he led thecompany's efforts on the Italian joint venture thatsourced and marketed the successful D'istintohrand. Leveraging this expertise, he is now leadinga new Spanish project.

Having the Right StuffAs we examined the activities of this handful ofcompanies that overcame their liabilities of origin,exploited their late-mover advantages, and cap-tured and leveraged learning in global markets, wewere struck by one commonality. From fast food toPharmaceuticals, from Brazil to Thailand, movingfrom the periphery into the mainstream of globalcompetition is such a big leap that it was always ledfrom the top. In each and every case, the emergingmultinationals had leaders who drove them relent-lessly up the value curve. These leaders shared twocharacteristics. First, their commitment to globalentrepreneurialism was rooted in an unshakablebelief that their company would succeed interna-tionally. Second, as their operations expanded, theyall exhibited a remarkable openness to new ideasthat would facilitate internationalism - even whenthose ideas challenged established practice and corecapabilities.

With a PhD in pharmacology from the Universityof Michigan, Ranbaxy's Parvinder Singh was alwaysa scientist-entrepreneur at heart. It was Singh whoenvisioned Ranbaxy as an international, research-based pharmaceutical company. Every time urgentdomestic needs appeared to overwhelm RikD prior-ities, he protected the programs that would supportforeign markets and those that searched for either



new drugs or new drug-delivery systems. Wheneverthe well-estahlished intermediates business ap-peared to monopolize international managers'stime and energy, he reminded them that theirultimate purpose was to move up the value curveand that the intermediates husiness was a means,not the end. Beyond speeifie aetions, Singh pro-tected the faith. Just like the aneient priests inrural India who seldom intervene in the communityhut who nonetheless exert a constant influenceover the lives and hehaviors of the villagers, Singhwas always there, standing up for internationaliza-tion. Respecting him meant respecting his dream,and that perhaps more than anything else pushedsenior managers to persist with international ini-tiatives, even when the costs appeared too high.

The second quality of glohal leadership-open-ness to new ideas-was most clearly and forciblydisplayed hy Dr. Peter Farrell, CEO of ResMed.ResMed is an Australia-based medical equipmentcompany that specializes in the treatment of abreathing disorder known as obstructive sleep ap-nea (OSA). Spun off in r989 by U.S. giant Baxter In-ternational, ResMed was a struggling start-up witha erude early product generating just $i million inannual revenue. By 1999, it was the world's numbertwo competitor in the fast-growing market for OSA treat-ment devices, and its productswere generating sales of some$90 million a year.

Farrell's receptivity to newideas was responsible for thisdramatic change in fortune. Al-though the company's eo-founder, Dr. Colin Sullivan, theinventor of ResMed's product,was acknowledged as one ofthe industry's most knowledge-able experts, Farrell pushedResMed's researchers to huildstrong networks with other lead-ers in the international medicalcommunity. He led a team on aworldwide fact-finding tour ofleading researchers and physi-cians, for example, and he puttogether a medical advisoryboard to help ResMed developits products to be the industrystandard. To help shape themedical dehate, the companyalso organized annual globalmedical conferences on OSA,distributing the proceedings in

ResMed-sponsored CD-ROMs. More recently, Far-rell launched a campaign to have the medical pro-fession recognize the strong links between sleep-disordered breathing and the incidence of strokesand congestive heart failure. It is a bold initiativeand requires substantial investment, but it bas thepotential to raise the medical profile of OSA dra-matically, and in doing so, multiply ResMed's tar-get market substantially. Farrell has also moved thecompany's center of operations in order to be closerto his largest and most sophisticated markets. Inthese and other ways, Farrell pushed the companyto act like a leading global player long before thatwas an operating reality.

Strong leaders changed the fates of ResMed andRanbaxy, Hardy and Jollibee, and the other compa-nies discussed here. These leaders are models forthe heads of thousands of marginal eompanies inperipheral economies that have the potential to he-come legitimate glohal players. Like Nelson Man-dela, they can lead their followers out of the isola-tionism and parochialism that constrains them.They can do so by climbing up the value curve intothe mainstream of the global economy. ^

Repr in t RO02OI To oidei leptints, see the last page of this issue.


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