strategy+business Winter 2013 : Page 69

B E S T B U S I N E S S B O O K S 2 0 13 / G L O B A L I Z AT I O N Zhou, professors at the Moscow School of Manage-ment SKOLKOVO, and Gerardo R. Ungson, a pro-fessor at the College of Business at San Francisco State University, spent three years identifying and studying these companies using a five-step process that included several screens of data analysis (financial metrics and frontier analysis to evaluate each company’s resource allocation efficiency), secondary data analysis, and field interviews. They ended up with a list of 70 “stars of the future”—22 in India and 16 each in China, Russia, and Brazil—that are the focus of their book, Rough Dia-monds: The Four Traits of Successful Breakout Firms in BRIC Countries. In it, the authors report that this select set of com-panies grew at an average rate of 43 percent per annum from 2000 to 2009. Moreover, they write, “in terms of profit margins and return on assets over an extended period of time, these rough diamonds match and often exceed the top five hundred private firms in their respective countries, not to mention the top twenty-five manufacturing firms in their countries and comparable firms worldwide.” How did the rough diamonds achieve this feat? The authors trace their success to a progressive sequence of four strategies that they label “the Four Cs of High Performance.” First, the rough diamonds capitalize on being late-comers to their industries, which are often global and already mature, with well-established technologies and scale advantages—all formidable barriers to entry. The rough diamonds can deal with this because they are un-usually adept at spotting the opportunities that arise in established markets during economic transitions, such as market liberalization, privatization, and shifts in con-sumer demand. For example, Russia’s OMK (United Metallurgical Company), which was cobbled together at low cost through the acquisition and consolidation of several run-down, state-owned metallurgical compa-nies, found success by focusing on two nascent markets: railroad wheels and large-diameter piping. Second, rough diamonds create inclusive market niches and segments. In emerging markets, demand is not only nascent, but often extremely fragmented as well. The enormous diversity in customs, cultures, and languages can be bewildering, especially in con-tinent-sized markets, such as China and India. Rough diamonds leverage their superior knowledge of local markets and customers to anticipate demand, secure first-mover advantages, differentiate their products and services, and consolidate their positions ahead of their foreign competitors. For example, Esmaltec, a Brazilian appliance manufacturer, changed production from one-door to two-door refrigerators, added frost-free tech-nology, and lowered the energy consumption on every one of its products, all without a large increase in price, while its Western competitors were waiting for high-end demand to grow. Third, rough diamonds craft operational excel-lence. The authors found that these companies all spend a good deal of time and effort develop-ing efficient and flexible opera-tions. Since distribution and logis-tics systems tend to be extremely fragmented in emerging markets, rough diamonds invest heavily in both backward and forward inte-gration, often building out com-plete supply chains of their own. In Brazil, for example, Magnesita developed an integrated supply chain from scratch, establishing a network that stretched from mining to the manufacturing of its nonclay refractory products to distribution and logistics. Rough diamonds also pay much attention to ensuring quality along the en-tire value chain, because trust in a company’s integrity can be even more important in emerging markets than elsewhere, due to weak institutions and a lack of en-forcement power. And they are innovative, building up their R&D capabilities by making investments in education, hiring top researchers, and creating focused learning centers. Finally, rough diamonds cultivate profitable growth. The conventional wisdom holds that success in emerging markets is a function more of rapid revenue and market share growth than of early profitability. However, such a top-line growth fetish often leads to overextension in emerging markets, because the requi-sites of growth—such as manufacturing facilities, man-agerial talent, and physical infrastructure—are limited best books 2013 globalization 69

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