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.

• What do you think is the best way to develop successful strategies for China?
  Let me start with the process of devising strategy and then talk about strategy content. In emerging markets like China, it is usually impossible to develop a “perfect” strategy on a drawing board in one round of iteration. There may even be no meaningful data on which decisions could be based. Market research cannot be conducted in industries that do not exist. In such a situation, I recommend executives to try out different strategic options that do not require significant investment at first, gather feedback on their effectiveness, eliminate unsuccessful candidates and look after those seeds that are promising. Instead of using a scatter gun approach and thus “boiling the ocean”, companies should start with a few strong hypotheses of what might succeed. Based on the evidence, the commitment and exposure to China can be increased step by step. To avoid the sunk cost fallacy of throwing bad money after good, exiting the market must at all times be regarded as a realistic option.

  As in a diverse ecosystem, a wide range of strategies can succeed in China if they are backed by a strong corporate resource platform. In this respect, execution is at least as important as positioning. In terms of entry vehicles, a firm may start with exporting to China, then set up a representative office there, establish a strategic alliance, take aminority stake in an existing company, transform it into a majority holding and later develop Greenfield sites. Along the way, it has tomake a deliberate choice between clear focus and rapid expansion. For example, a foreign cereal maker learnt about the dangers of proliferation and came to appreciate the value of concentrating resources. It discovered that trying to succeed in all of China’s regions with its entire product range targeting a wide range of customer segments through myriad channels resulted in a collection of feeble positions. Afterwards, it focused on a small number of carefully screened opportunities, such as a set of what I call “experiential quadruple ones”: One product for one market targeted at one segment distributed through one channel. This approach makes it also easier to attribute success or failure to a limited set of factors. The company can subsequently grow those ventures that succeeded in the pilot stage.

  A second important choice is between molding the environment and adapting to it. A multinational company may either shape the market, pushing a novel concept to it, or tailor its product offering and business model to the local circumstances. Among other things, factors to consider are global economies of scale favoring market shaping with standardized offerings on the one hand and local idiosyncrasies requiring customization on the other hand. Executives have to be particularly careful to avoid the “products-insearch- of-markets” trap. For example, they should not dump old technologies to China, assuming that this will satisfy most Chinese people. Many Chinese customers are global early adopters, eager for the latest products. Kodak singled out China as a large market for traditional photography. But people in the Middle Kingdomwere fast to embrace digital technology. Likewise, mobile technology spread more quickly than many analysts expected. A large number of households did not bother to acquire fixed phone lines, but leapfrogged into the wireless future.

  It is also vital to prepare for the emergence of a broad middle class in China. Executives must abandon incorrect mental models, such as the belief that only high-income segments are attractive,which need to be served with premium products. To capture market share among low income households that are likely to get richer, it might not be sufficient to tweak products. Companies may have to develop an entirely new value delivery system to offer reliable, no frills products at very low prices. This might require reconfiguring resources in novel ways or acquiring tangible and intangible assets. Along the way, it is crucial to keep the China unit integrated in the global organization.