Just 2% of the top 500 companies in the world listed in the magazine Fortune are Latin American. Even though the region is lagging behind, some Latin American companies have transformed over the past few years to become solid global competitors that have earned a place on the Fortune list. They have created their own supply chains, improved their technical capacities and quality standards, and, in some cases, even acquired companies and brands from developed economies.
Although internationalization processes have been studied extensively, very little has been investigated about the success strategies that have led these companies to cross the competitve threshold with global standards.
Historically, companies in emerging economies have competed in the global market using uncommoditizing strategies – i.e., offering products that are less sophisticated, less differentiated and at a lower price for consumers with lower purchasing power. In general, these companies manufacture products of little added value and are usually suppliers or partners of foreign multinationals, trapped in an unprofitable link of the value chain. When these companies expand to other countries, they usually compete for low costs and not for the quality and reputation of its products, making them susceptible to the ups and downs of market prices.
However, some companies have freed themselves from this price dependency through uncommoditizing strategies, generating competitive advantages, and becoming leaders in their sectors and role models for other Latin American companies.
Disclosing these strategies was the objective of the article “Uncommoditizing strategies by emerging market firms”, published in the Multinational Business Review and cowritten by Doctors Cuervo-Cazurra, from Northeastern University (USA), Fleury and Carneiro, from Fundação Getulio Vargas (Brazil), Finchelstein, from Universidad de San Andrés (Argentina), Durán, from Universidad Adolfo Ibáñez (Chile), González-Pérez, from EAFIT (Colombia), Borda, from ESAN (Peru), Newburry, from Florida International University (USA) and Montoya, from EGADE Business School (Mexico).
In the paper, we studied 18 globally competitive companies from the six largest economies in Latin America: Brazil, Mexico, Argentina, Colombia, Peru and Chile. They are from diverse industries and sectors, but have all created their own competitive advantages, with quality, reputable products at premium prices, despite the context of their national economies, with a greater dependency on raw materials, low wages and the lack of a favorable innovation ecosystem.
Three winning strategies
Three of the decommoditization strategies of the companies analyzed are highly relevant for emerging countries, although they need to be adapted to the particular circumstances of each country and industry, and their own idiosyncrasies.
1. Tropicalized innovation
By tropicalized innovation, we do not mean adapting innovations from advanced economies, but instead generating own innovations, specially designed for emerging markets, which are characterized by: the low income level of consumers and the low level of infrastructure available in these countries. These strategies adapt to other emerging economies and can even be successful in developed economies (the so-called reverse innovation).
There are two types of tropicalized innovation:
- Product innovations: These products achieve a better production cost-price balance through the reduction of features that are not as highly valued by consumers, but without sacrificing functionality and quality. The aim is are not to produce a low quality version of the product sold in developed countries, but to take into consideration the real needs of consumers from emerging markets, in order to create something new.
For example, Metalfrio, a Brazilian firm that manufactures refrigerators and freezers, transformed a contextual advantage into a competitive advantage. Owing to Brazil’s humid, hot tropical climate, together with the lack of air-conditioning systems in shops and the deficient national road network, the equipment had to be highly resistant and durable. These characteristics made their units apt for sale in countries with similar conditions, such as African nations, Mexico or Turkey. Surprisingly, Metalfrio also sells its products in Siberia (Russia), where its refrigerators keep beverages hotter (instead of colder) than the outdoor temperature.
Another product innovation for emerging markets is the one generated by the Mexican retailing and financial company Elektra, which bases its business model on providing credit to low-income consumer segments to purchase domestic appliances and other products. The Monterrey-based firm has taken advantage of the similarity between the Mexican context and that of Central American countries, where it has expanded thanks to a standardized business strategy of brand, product mix, similar credit policies and strategic suppliers.
- Local brands: Consumers tend to prefer global brands, which they associate with attributes such as quality and safety. Nevertheless, companies from emerging countries can build reputable, reliable brands that are able to have an impact on local consumers because of their extensive knowledge of the local market.
A well-known case is Bimbo, a Mexican multinational operating in 22 countries, whose strategy is based on selling leading brands and top quality products, resulting from its investment in continuous innovation. In its internationalization process, the bakery acquired foreign companies, but kept the local brands, flying the flag for its focus on product diversity (with an offering of over 7,000 products) and excellence in distribution. Its first international foray was into the US Mexican migrant market, a strategy also followed by the corn and wheat tortilla brand Gruma.
2. Global efficiency
Companies from emerging markets that focus on improving their productive and decision-making processes, instead of relying solely on low labor costs or the availability of raw materials, can reach higher levels of efficiency than their counterparts in developed countries.
Economies of scale achieved by these firms as a result of their dominance in their markets of origin facilitate global efficiency. Many of them focus on obtaining quality certifications to demonstrate their capacity to produce better products or their superiority as suppliers.
For example, the Argentine state company INVAP, which manufactures nuclear reactors, satellites and radar systems, among other technologies, is the only Argentine firm certified by NASA. It emerged in the seventies as a result of the import substitution policy and currently exports to countries such as Egypt, Saudi Arabia, Australia and Holland, among others. Despite its public ownership, it has managed to isolate itself from Argentina’s political and economic instability in order to continue developing its technology and engineering capabilities at the global level.
Global efficiency in emerging markets can also be accomplished through process innovations, a type of innovation that is more difficult for the competition to imitate.
The Chilean utility company Colbún grew by means of process innovation strategies. It progressed from being a state-owned company, to being listed on the stock market; from generating solely hydroelectric power, to generating thermal and renewable energies; and from operating only in Colbún and Machicura (Chile) to controlling 26 hydroelectric plants Chile and Peru.
In addition to reducing production costs, global efficiency drives the creation of products with fewer defects, obtaining higher operating margins, even when the products are sold cheaply. Enhanced quality and reliability allow companies to ask for a better price for their products.
Juan Valdez Café opened its first coffeehouses in 2001, offering coffee from more than 500 thousand small producers, represented by the Colombian National Federation of Coffee Growers. By the end of 2017, it had 414 establishments across America, Asia and Europe. Its strategy design focused on creating added value through brand consolidation, strengthening vertical integration, single origin (traceability) and, above all, the premium coffee experience, innovations also motivated by the competition, Starbucks, Dunkin’ Donuts and Krispy Kreme, which opened Colombia in 2014.
3. Coordinated control
Finally, coordinated control is the capacity directors have to control the value chain and make sure that their decisions are swiftly integrated and implemented.
As companies from emerging markets modernize their processes, investing in R+D (research and development), technology, marketing and brand management, they can gradually reduce their dependence on unreliable suppliers and distributors and make their control tools more sophisticated. Controlling and monitoring the value chain is even more necessary in emerging countries, given the weak context in contract fulfillment. This control also allows them to identify new ways of innovating and improving consumer services, which reinforces tropicalized innovation and global efficiency.
For example, when the Peruvian dairy group Gloria discerns an international opportunity, it follows one of these two strategies: in the case of emerging markets, such as Bolivia, they reproduce the Peruvian model of partnering with dairy farmers and creating a brand that ultimately dominates the market; in the case of mature markets, such as Argentina, they use it as a platform to export high-added-value products. Both strategies imply a strict control by the head office in Arequipa.
Another characteristic of the Latin American companies analyzed in this study is the entrepreneurship of their directors, who, motivated to achieve profitability and excellence, have developed the capacity to control the value chain. These companies speedily adapt to the needs of new clients and to the latest market trends, entering and exiting businesses according to their goals.
This is the case of the software service supplier Globant, created by four Argentinian engineers after the peso devaluation crisis of 2003, taking advantage of cheap, qualified labor. Innovation, flexibility, quality human talent and an entrepreneurial spirit led them to expand to 12 countries and offer customized solutions for such prestigious clients as Disney, Cisco, Puma or American Express.
There are undoubtedly many success stories among Latin American companies that have followed uncommoditizing strategies to compete internationally, beyond the traditional focuses on raw materials and labor costs.