Business Case Studies, Executive Interviews, Kai-Alexander Schlevogt on Emerging Markets

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Executive Interviews: Interview with Kai-Alexander Schlevogt on Emerging Markets
February 2008 - By Dr. Nagendra V Chowdary

Prof. Kai-Alexander Schlevogt
Professor of international strategy and leadership at the National University of Singapore (NUS) Business School. He serves as Program Director of the Nestle Global Leadership Program, delivered in association with London Business School.

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  1. Limited Corporate "lebensraum"
    A given industry may only support a small number of players. A natural monopoly, such as railways, is a point in case. Besides, in any given place, only a limited number of megashopping malls may be viable. In such a constellation, acting first can preempt other competitors or at least force them into an uphill battle to replace you. It may also decrease the threat of substitutes. For example, by investing in a popular high-speed train, competition from coaches may be subdued.
  2. Clear and Present Threat
    Domestic companies may be gaining strength in China and later attack the multinational elsewhere. In this case, foreigners might need to attack them at source before it is too late.
  3. Unique Window of Opportunity
    There might be valuable openings in China, which could disappear quickly. For example, temporary business opportunities might arise in connection with the Beijing Olympics. Some of these opportunities may make it possible to “move the needle”. In this case, leaders should behave opportunistically and catch the bird before it flies away. But they need to refrain from hastily drawing conclusions. Upon close examination, some opportunities may turn out not to be unique after all.
  4. Resource Lock-in
    By moving early, it might be possible to capture unique tangible and intangible resources, such as locations, talent and licenses. Such action can create high barriers to entry or shut out competitors completely. The principle is the same as in the highly popular game of Monopoly. Once you have bought a street, others cannot grab it anymore unless you come under financial distress and are forced to sell. However, certain assets can become a liability. For example, Volkswagen’s early success in China was partly due to strong long-term relationships with local suppliers. After China entered the WTO, car makers had more choices of suppliers. But Volkswagen could not take advantage of alternative sources, since it was locked into its network.
  5. Low Global Opportunity Costs
    Economists know that there is no free lunch, but corporate strategists often overlook this sobering fact. For example, by investing heavily in digital photography at an early stage, Kodak had fewer resources for traditional photography while it was still a viable business that generated significant amounts of cash. As a consequence, it lost market share to Fuji in the traditional market that it had dominated for several decades. Likewise, opportunities in China are not to be viewed in isolation. They should only be pursued if they are attractive compared to the next best alternative anywhere else on this planet.
  6. Binding Trajectory
    If you need to go through different development stages every time you pursue a certain objective, it may make sense to move first. Those who want to imitate you cannot just capitalize on your experience and leapfrog, but are compelled to pass all the stages themselves. The principle is similar to careers. An aspiring academic must complete his bachelor and master degree, and then earn a Ph.D. before he can become an Assistant Professor at a reputable university. Likewise, an equestrian has to pass all obstacles in a show jumping course in the mandated sequence. In business, it takes time to build a far-reaching distribution network, valuable brand, and ubiquitous mindshare. Customer loyalty depends on concrete experiences. Companies may also profit from learning curve effects and positive system dynamics, which can result in increasing returns. To reduce catch-up time, it may be possible to acquire assets. But the total outlays – including the complexity and disruptions associated with integrating the purchase – might exceed the costs of doing it yourself.
  7. Strategic Veil
    If companies can hide behind a cloak of mystery as to what made them succeed, they are likely to defend firstmover advantages. For example, competitors might find out that an investment bank obtained a valuable license in China owing to its strong reputation. But they may be unable to determine how the winner was able to develop such a good standing in the first place and thus be unable to imitate him. Another strategic veil is the ability to engage in stealth fighting. As long as a company can develop its business in secrecy, building up strong positions and accumulating valuable resources below the radar screen of competitors, it cannot be copied by them. An example would be shrewd networking with key policy-makers and opinionleaders, which may transform markets once an inflection point has been passed.
  8. StrategicMalleability
    Sometimes the business environment is similar to a piece of clay, which can be molded according to one’s wishes. The first mover may even create an industry or a product category. If he is smart and moves carefully, he will enjoy sufficient breathing space to capitalize on his investments. However, shaping can be very risky. With the benefit of hindsight, many people find it obvious that a fast food industry emerged in China. But when McDonald’s and KFC entered the Middle Kingdom, it was not clear at all whether the Chinese, with their sophisticated food culture, would embrace French Fries and other junk food. Starbucks executives, too, made a leap of faith and relied on sheer will when they pushed coffee into the tea-drinking society. Shapers sometimes succeed by integrating an unfamiliar product into a comprehensive value proposition, full of intangible benefits that are compatible with the foreign culture. For example, the experience of socializing in a Starbucks outlet may be more valuable to Chinese guests than high quality coffee alone. In the early days of the reform and opening era in China, couples held wedding banquets in McDonald’s restaurants! Besides, first movers face the danger that late comers capitalize on their pioneering work when the industry takes off without having invested in the early parts of the Scurve where the marginal returns on the investment are low. For example, a company like Club Med might introduce the concept of club holidays in China and educate the market about its benefits. Then, Robinson Club, its competitor, may target the newly enlightened customers without having to spend heavily on education. One of the worst variant is the generic fallacy, a case of spectacular success breeding equally spectacular failure. A certain brand name, such as Maggie, may become the generic term for an entire product category. In this case, late movers can profit from the brand equity, without having invested in it.
  9. Innovativeness
    Sooner or later, most products and business models can be copied. Under this scenario, moving first only makes sense for a company if it is able to leverage its positions to generate new advantages thereafter, often by engaging in acts of creative destruction. The key to sustained distinctiveness is the ability to constantly innovate and act faster than competitors, thus becoming a moving target that drives others into despair. He who perpetuates innovation does not need to worry too much about plagiarism. By the time competitors have imitated him, he has already moved on. Others can steal your catch, but with the rod in hand and oceans full of fish, you will prosper.


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