Uncommoditizing strategies by emerging market firms

See discussions, stats, and author profiles for this publication at: https://www.researchgate.net/publication/326958088 Uncommoditizing strategies by emerging market firms ArticleinMultinational Business Review · August 2018 DOI: 10.1108/mbr-07-2017-0051 CITATIONS 35 READS 1,803 9 authors, including: Some of the authors of this publication are also working on these related projects: Strategy and performance of family firms around the world View project Sustainability View project Alvaro Cuervo-Cazurra Northeastern University 166 PUBLICATIONS10,791 CITATIONS SEE PROFILE Jorge Carneiro FGV Sao Paulo School of Business Administration 66 PUBLICATIONS953 CITATIONS SEE PROFILE Diego Finchelstein Universidad de San Andrés 18 PUBLICATIONS147 CITATIONS SEE PROFILE Patricio Duran University of Richmond 35 PUBLICATIONS1,606 CITATIONS SEE PROFILE All content following this page was uploaded by Alvaro Cuervo-Cazurra on 01 December 2018. The user has requested enhancement of the downloaded file. 1 UNCOMMODITIZING STRATEGIES BY EMERGING MARKET FIRMS * Alvaro CUERVO-CAZURRA Northeastern University, D’Amore-McKim School of Business 360 Huntington Avenue, 313 Hayden Hall, Boston, MA 02115-5000, USA Phone: +1 (617) 373-6568, Email: [email protected] Jorge CARNEIRO FGV Sao Paulo School of Business Administration Av. Nove de Julho 2029, São Paulo, SP 01313-902, Brazil Phone: +55 21 99163-4177, Email: [email protected] Diego FINCHELSTEIN Universidad de San Andrés - CONICET Vito Dumas 284, Victoria, Buenos Aires, 1428, Argentina Phone: +54 11 4725-7059, Email: dfinc[email protected] Patricio DURAN Universidad Adolfo Ibáñez Av. Diagonal Las Torres 2700, Peñalolén, Santiago, Chile Phone: +56 2 23311214, Email: [email protected] Maria Alejandra GONZALEZ-PEREZ Universidad EAFIT Cra 49 Nro 7 Sur – 50. Bl. 26-416. Medellin, Colombia Phone: +57 4 2619500, Email: [email protected] Miguel A. MONTOYA Tecnológico de Monterrey, Escuela de Negocios Av. General Ramon Corona 2514, Zapopan, Jalisco 45201. Mexico Phone +52 33 3669 3000, Email: [email protected] Armando BORDA-REYES Universidad ESAN, Graduate School of Business Alonso de Molina 1652, Monterrico Chico, Santiago de Surco. Lima, Peru Phone: +51-982-982-102, Email: [email protected] Maria Tereza Leme FLEURY Fundação Getulio Vargas - SP. Av. Nove de julho 2029, Bela Vista, São Paulo, SP 01313902, Brazil Tel.: +55 11 37997801, email: [email protected] William NEWBURRY Florida International University Modesto A. Maidique Campus, 11200 S.W. 8th St, RB 310, Miami, FL 33199 Tel. +1 (305) 348-1103, email: [email protected] May 13, 2018 For the published version, please see: Cuervo-Cazurra, A., Carneiro, J., Finchelstein, D., Duran, P., Gonzalez-Perez, M. A., Montoya, M. A., Borda Reyes, A., Fleury, M. T. L., Newburry, W. 2018. Uncommoditizing strategies by emerging market firms. Multinational Business Review (Forthcoming) https://www.emeraldinsight.com/doi/abs/10.1108/MBR-07-2017-0051 * This article is based on a panel presented at the Academy of International Business Latin American Chapter 2017 annual meeting held at ESAN, Lima, Peru. We thank Daniel Shapiro, the editor of Multinational Business Review, for the opportunity to gather the ideas presented there in this article, and the reviewers for useful suggestions for improvement. 2 UNCOMMODITIZING STRATEGIES BY EMERGING MARKET FIRMS Abstract: We analyze how emerging market firms upgrade their capabilities to international levels. We focus on the development of uncommoditizing strategies that enable emerging market firms to go beyond the usual price competition with low-quality products and, instead, serve customers with premium pricing and quality and reputable products. From the analysis of eighteen Latin American companies from six countries in a variety of industries, we propose three dimensions of uncommoditizing strategies: (1) tropicalized innovation, in which firms develop product innovations and brands that are adapted to the needs of emerging economies, enabling them to differentiate their products; (2) global efficiency, in which firms develop efficient processes that reduce costs, helping them to generate reliable and high-quality products; and (3) coordinated control, in which firms expand their presence into higher value added segments of global value chains to achieve control and use fast decision making to ensure rapid response to new customer demands. Keywords: competitive advantage, strategies, upgrading, capabilities, emerging markets, commodities, Latin America 3 INTRODUCTION Emerging market firms are becoming increasingly credible and vigorous competitors against advanced economy competitors. For much of the 20th century, advanced economy multinationals dominated the competitive landscape. However, recent decades have witnessed a transformation of this competitive pattern (Ramamurti and Singh, 2009) and emerging economy companies, which used to be input suppliers and usually internationalized only through exports, have become leading multinationals on their own (BCG, 2016). They have built parallel supply chains and, in some cases, acquired well-known advanced economy companies and brands (Madhok and Keyhani, 2012). Some have excelled in technical quality and have become serious contenders (if not world leaders) in international markets (BCG, 2016; Cuervo-Cazurra, Newburry and Park, 2016). This remarkable transformation has resulted in a growing literature analyzing the processes that enabled these companies to become highly competitive in a short time and conquer world markets (see articles in special issues edited by Aguilera et al., 2017, Aulakh, 2007, Cuervo-Cazurra, 2012, Luo and Tung, 2007; Meyer and Peng, 2016; chapters in books edited by Cuervo-Cazurra and Ramamurti, 2014; Merchant, 2016; Ramamurti and Singh, 2009; Williamson et al., 2013; and managerial books such as Guillén and García-Canal, 2012; Khanna and Palepu, 2010). Whereas much of the literature has focused on their internationalization process, we aim to contribute to the literature by analyzing how emerging market firms have developed uncommoditizing strategies that enabled them to upgrade their capabilities and demand premium pricing from selling reputable, quality products. Emerging market firms face larger challenges than their advanced economy counterparts, because many firms in emerging economies tend to use commoditized strategies, competing on low prices and relatively similar, low-quality products. When these companies expand abroad, many of them continue operating with this commoditized approach to competition and rely on home country comparative advantages to sell products on a low-cost basis. This approach places firms at the mercy of market prices. In contrast, some emerging market firms have been able to break this price dependence and have used uncommoditizing strategies to build their competitive advantages. We analyze eighteen firms in six Latin American countries that have followed these strategies. Many of these companies have not yet gained academic attention but have been able to upgrade their competitive advantages to international levels. Although some are at the early stages of internationalization, others are competing face-to-face with advanced market counterparts and have become global leaders in their industries. Based on the cases studied, we find that emerging market companies can develop uncommoditizing strategies to achieve international competitiveness in three ways: (1) tropicalized innovation, developing innovations and brands that are designed to meet the needs of emerging economy customers, helping the firms differentiate their products; (2) global efficiency, focusing on developing efficient processes that lower costs and produce products of higher quality and reliability; and (3) coordinated control, expanding into high value-added parts of global value chains to ensure control and use fast decision-making to respond to new customer demands. COMMODITIZED STRATEGIES AND COMPETITIVE ADVANTAGE IN EMERGING MARKETS Many companies compete using commoditized strategies, in which products are mostly undifferentiated and competition tends to be based on prices, with limited ability for product differentiation. This is a typical approach in industries in which products are based on the endowments of the country and products are extracted (e.g., minerals, oil, and gas) or grown (e.g., agricultural products, meat, wood) and then traded in markets that provide a price of reference for a standardized quantity and quality of the product (e.g., barrel of West Texas Intermediate oil, bushel of corn). In these industries, products are considered similar regardless of the producer, and thus competitive advantage in these industries focuses on achieving low costs. However, in emerging markets, commoditized strategies are also used in not-commoditized industries. In emerging markets firms may compete on a low-price basis, achieving lower costs by offering products/services that are simpler, with fewer features, or lower quality than their competitors, targeting price-sensitive costumers and aiming to achieve profitability through efficient production and distribution 4 (Prahalad, 2005). Additionally, emerging market companies may end up commoditizing their offerings because they are part of the value chains of other companies and have been relegated to the lower valueadded segments of these chains. In these cases, companies focus on offering products to brand owner specifications, and compete by providing undifferentiated products at a lower price. These companies are called original equipment manufacturers (OEMs) when they operate in durable consumer products, producing for other companies that have subcontracted manufacturing and provided product specifications while the brand is managed by the contractor of the OEM supplier (Holcomb and Hitt, 2007). The same strategy exists for non-durable consumer products, with companies producing what are known as private or white label products, sold under a retailer or distributor label (Steiner, 2004). Finally, the achievement of standards in technology and processes may result in industries standardizing their offer and subcontracting to lower-cost suppliers (Davenport, 2005). Commoditized strategies tend to be more prevalent among emerging market companies as the result of the characteristics of their countries. Emerging economy consumers tend to be large segments of the population with much lower income levels and as a result are more price-sensitive than advanced economy consumers (Prahalad, 2005). Thus, emerging economy firms tend to compete on price. Moreover, many emerging market companies that have internationalized have done so as part of the global value chains of advanced economy multinationals, serving as local partners in their home countries and learning about sophisticated technologies from the advanced country partners (Cuervo-Cazurra, 2008; Luo and Tung, 2007). In these cases, the emerging market companies have tended to focus on product assembly and manufacture for the owners of the brands under which their outputs are sold in advanced economies. The focus of emerging market firms on commoditized strategies is reinforced by the weak innovation systems of these countries. Emerging economies, compared to advanced ones, have fewer scientists, weaker property rights protections, and scarce relationships between firms and universities (OECD, 2016), which leads to fewer patents and less sophisticated innovation. As a result, many emerging market firms tend to follow commoditized strategies at home and in many cases continue using commoditized strategies even when they internationalize, relying on the comparative advantage of the home country and selling on the basis of low prices. They tend to invest less in the development of sophisticated brands that can be used in other countries because they have been accustomed to producing standardized or low-end products. They also suffer from limitations in the creation of innovations because of the less supportive innovation system in the home country. Thus, they end up focusing on lowering costs of production, creating low-quality products, and selling on the basis of low prices. Nevertheless, some emerging market firms have broken away from this pattern and have become industry leaders (see, for example, the firms listed in BCG, 2016). To understand better how emerging market firms develop uncommoditizing strategies, we undertake case study analyses. RESEARCH DESIGN We study eighteen Latin American companies across six countries to understand how firms upgrade their capabilities to become internationally competitive and compete with premium pricing and quality and reputable products, i.e., uncommoditized strategies. We focus on Latin American companies because many of these countries have traditionally developed using natural resource endowments and their firms have tended to rely on these in their internationalization, i.e., relying on country-specific advantages rather than on firm-specific advantages. For emerging economies, large natural resource endowments have been described in some cases as a curse rather than as a blessing, because many countries end up with exploitative development, highly concentrated wealth, and a high dependence on commodity prices (Ross, 1999). Latin American countries, many of which possess large endowments of mineral wealth and agricultural conditions, are no exception (Bulmer-Thomas, 2003). Nevertheless, some companies operating in commoditized industries have achieved global competitiveness based on their efforts, i.e., building their firm-specific advantages, rather than merely on bestowed comparative advantages of the countries from which they originated, i.e., relying on country-specific advantages (de Ferranti, Perry, Lederman, and Maloney, 2002). These are the firms we study. 5 The firms we analyze are exceptional in their countries and industries and examples of how to break away from price-based competition. They have achieved an ability to differentiate their products and charge premium pricing despite coming from emerging economies. Table 1 lists the companies and their key features. *** Insert Table 1 about here *** We gathered information from secondary sources, including financial press, company websites, case studies and industry reports. In some cases, we collected primary firm data (see Table 1). Based on this information, we created brief case studies to help understand the processes followed by the companies to break away from price competition. We analyze not only typical R&D investments (Helfat, 1997), but also other processes used to upgrade capabilities such as licensing of foreign technology, alliances with foreign companies, and acquisitions of foreign firms (Cuervo-Cazurra, 2012; Cuervo-Cazurra and Ramamurti, 2014; Luo and Tung, 2007). Some of the processes varied across industries, partly due to differences in technology markets and providers. We focused on the six largest economies in the region by GDP and present them in descending order: Brazil, Mexico, Argentina, Colombia, Chile, and Peru. For each nation, we selected three cases that we consider unique regarding being able to achieve global international competitiveness levels despite coming from emerging economies, and thus suffering from typical challenges of underdeveloped innovation systems, less sophisticated customer demands, lower-income customers, and in some cases unstable political systems and underdeveloped institutions. The case studies provide broad coverage of the competitive arena, as they encompass both manufacturers and service providers, offerings targeting either end-consumers or organizational buyers, and different demand profiles (global vs. local needs). The firms were chosen to provide a wide diversity of upgrading of capabilities, and they include smallish and very large firms, in a variety of industries and under a multiplicity of ownership, and with a large diversity in their international presence, including firms that are in the early stages of international expansion and companies that are established multinationals. Following the traditional recommendations on how to conduct case study research (Yin, 2017), we first conducted within-country comparisons, taking into account the contextual influences of collaborative technology development in each country, and then did cross-country comparisons to understand better industry-level influences. To facilitate the analysis of each case and the comparisons across cases, we used the same analytical framework for the companies, identifying the sources of differentiation (quality enhancement, added services, marketing-related) and value added (R&D and technology in process and product, operational processes and managerial processes) that enabled these firms to upgrade their capabilities and compete on the basis of premium pricing, quality and reputation. After completing the within-country comparisons we developed cross-country case comparisons to identify common processes used by emerging market companies to develop uncommoditizing strategies that enabled them to upgrade capabilities and compete globally, as well as identify differences that can have additional or countervailing influences on these processes. CASE STUDIES: UNCOMMODITIZING STRATEGIES BY LATIN AMERICAN FIRMS We now present case studies grouped by country to facilitate our withinand across-country comparison of the competitive advantage development process. The cases illustrate how the firms developed their competitive advantages before venturing abroad. Our focus is on competitive advantage, not on internationalization, even if some improved their competitive advantages from their international activities. Uncommoditizing Strategies by Brazilian firms Brazil has more than 200 million inhabitants and a 2016 GDP of US$ 3,147 billion PPP (World Bank, 2017) – the seventh largest in the World. The country has experienced an unstable growth pattern (from 7.6% in 2010 to -3.6% in 2016). Brazil is a consolidated presidential democracy with reasonably stable institutions but has suffered turmoil due to an intense fight against corruption. Due to a large area of arable land (which has been increasing thanks to R&D efforts to develop new seed varieties by state research agency EMBRAPA) and favorable climate, Brazil is an economic power in agricultural and 6 livestock. Minerals are also abundant. For our study, we examine BRF, Eurofarma, and Metalfrio. Table 2a summarizes their sources of advantage. *** Insert Table 2a about here *** BRF resulted from the merger of the two top Brazilian producers of poultryand pork-related products: Sadia and Perdigão. Sadia initiated exports in 1975 and established joint ventures in technology in 1989 (Japan) and production in 1990 (Portugal); it has processing facilities in Abu Dhabi, Argentina, the Netherlands, and the UK, and commercial offices in Dubai, Japan, Singapore, and the UK. Perdigão started exporting in the 1970s, reaching Japan in 1985 and Europe in 1990. The company operates one distribution center in Europe and has commercial offices in twelve countries. BRF produces processed meat (mainly poultry and pork, but also beef) and also competes in milk, margarine, pasta, pizzas and frozen vegetables. As Brazil’s poultry leader, the company faces domestic regulatory limitations to growth (particularly through acquisitions). BRF is the world’s tenth largest food company, biggest poultry exporter and secondlargest meat exporter. More than 50% of BRF’s sales come from foreign markets. BRF usually builds its processing plants in countries where it has previously exported to and can add value locally. Abroad, the firm is building brand reputation. First, they are forward integrating by processing chicken and branding it. In the words of their Director of M&A and Strategic Planning, “someone that processes [the chicken], that adds value and adds a brand – I want to be this guy in these markets.” Their experience abroad has allowed BRF to learn innovative practices, which can be replicated in Brazil and other countries. From its Brazilian experience, BRF learned to produce smaller packages, which is useful in other emerging markets. Although BRF recognizes that advanced country multinationals (AMNEs) also attend to differences in consumption habits and patterns, “they [AMNEs] adapt; we [BRF] have it in our DNA.” BRF recently removed reference to “Brasil” from its official name to avoid potentially detrimental effects on the company’s image and sales abroad. Intense, consistent and long-lived investments (e.g., feed rations, raising techniques) and strict though virtual value system control (from egg-producing to animal raising) has enabled BRF to achieve higher-quality chicken and pork packaged products. In Brazil, BRF has invested heavily in its main brands (Sadia and Perdigão). Abroad, the company has acquired companies to exploit its brand equity and deploy its brand promotion expertise. However, BRF also promotes the Sadia brand and has launched the Perdix (easier to pronounce in several languages than Perdigão) brand. Before venturing abroad, BRF already benefited from economies of scale in Brazil and excelled in production, distribution, commercial activities, and marketing. Some cost efficiencies derived from favorable home-country conditions – advantageous weather for chicken-raising, plus easy (and cheap) access to water and feed. In short, the upgrading strategy of BRF derived from global efficiency (using economies of scale, R&D in process technology, and operational process excellence), coordinated control (via expansion of the value chain) and tropicalized innovation (local brands and products adapted to local needs). Eurofarma was founded in 1972 and is one of the few Brazilian pharmaceutical multinationals. Its prominent position in Brazil may soon subject the company to domestic growth limitations (mainly through acquisitions, due to government restrictions). Eurofarma’s first FDI occurred in 1979 in Argentina, and the company now operates six plants in Latin American countries besides the six in Brazil. Exports started in 2002, and Eurofarma is now present in more than 20 countries (in South and Central America, the Caribbean and Africa), which represent 83% of Latin American GDP. Eurofarma also has a stake in a North American pharmaceutical firm. The company achieved multiple awards for innovation (one of 20 companies in Best Innovator Brazil 2015), sustainability (twice first place in Exame’s Sustainability Guide), and workplace (10 years on Você S/A’s “Best Companies to Work For” and three consecutive years on Época’s “Great Places to Work”). Eurofarma obtained its first patent in 2007, launched the first biosimilar drug in Latin America in 2016 and invested 5.1% of net sales in R&D in 2016. Eurofarma makes mainly prescription-exempt drugs and generics and supplies hospitals directly with parenteral solutions. Eurofarma’s Brazilian sales do not fill plant capacity; thus, the company became an outsourcer for large labs (Merck, Pfizer, Eli Lilly, among others) and also licensed from other labs to produce and sell their products (under Eurofarma’s labels) in Brazil. In the early 2000s, Eurofarma realized it would benefit from a larger market, and decided to enter 7 other countries in Latin America before going truly international. In the words of Eurofarma’s International Area and Export Director, “you start to be more representative, you increase your purchase power, your purchased volume expands, you become more relevant to suppliers [potential licensors], you make better deals.” Although 2013 foreign sales represented only 8% of total sales, Eurofarma’s Director expected that “by 2020 [foreign sales] will be around 20-25%.” As it acquired Latin American competitors, Eurofarma “gained access to new suppliers [i.e., licensors] […] and, in some cases, paying lower prices [than the firm had been able to negotiate in Brazil].” Foreign markets have been opportunities for Eurofarma to expand sales: “Our focus was to operate in Latin America, Africa, Middle East and Asia. We started to export to these countries where there were distributors and local producers that wanted to complete their portfolio with products that we had.” Eurofarma attempts to replicate their Brazilian commercial model in other Latin American countries. Although Eurofarma’s main business model is based on licensing from others, it also invests in R&D and considers (outward) licensing of its products in countries with no company presence. Interestingly, the expansion abroad has helped the firm improve relationships in Brazil with “regulatory agencies, Government, and BNDES [the National Development Bank],” because “Brazilian Government wants to strengthen the pharmaceutical industry to help the trade balance....” Eurofarma’s competitive advantage stemmed from global efficiency (R&D process technology and, more recently, product technology) and tropicalized innovation (i.e., offering a varied drugs portfolio). Metalfrio manufactures commercial refrigerators/freezers (for beverages, ice cream, frozen foods). Founded in 1960, it was acquired in 1992 by a German company, which then sold Metalfrio to a Brazilian investment fund in 2004. Having exported for over 30 years, Metalfrio undertook its first FDI in 2005 with a greenfield plant in Turkey. The firm currently operates plants in Brazil, Mexico, Russia, and Turkey and has distribution centers in the US and Mexico. With sales in over 80 countries, international sales account for about 40% of revenues. Metalfrio is the Latin America leader and the third largest globally in its class. In Brazil, its products are present in over 90% of stores with commercial refrigerators; the company controls more than 50% of the commercial refrigeration market and about 30% of the horizontal freezer market. Almost since inception, Metalfrio has invested in innovation and technology. The quality of its products (reliability and tolerance for harsh conditions), international certifications, and post-sales service have led several Brazilian clients (e.g., soda and beer multinationals) to push Metalfrio abroad in a clientfollowing expansion. Metalfrio products feature low downtime due to their design for quick swapping of defective parts. Additionally, the company offers customized solutions and invests in branding. Abroad, Metalfrio has acquired several companies and kept their brands (e.g., Danish companies Caravell and Derby, and Turkish company Klimasan) to exploit brand equity. However, the company intends to use its own name and has been exporting commercial refrigerators under the Metalfrio brand. In Brazil, the company has for a long time invested heavily in client relationships, which reinforces its corporate reputation. With foreign plants, Metalfrio can serve key accounts better, since exports from Brazil are not economically feasible to some countries because of transport costs and import tariffs. Metalfrio has transformed a difficulty into a competitive advantage. Thus, its origin in a tropical (i.e., hot and humid) and emerging country where few stores have air conditioning and roads are poor means that refrigeration units must be durable and heavy duty. Such characteristics make it easier for Metalfrio to sell to similar markets, such as African countries. Interestingly, Metalfrio also sells to Russia, specifically Siberia, where their appliances keep beverages warmer (instead of colder) than the outside temperature. The company enjoys economies of scale (in production, marketing, distribution, procurement, R&D and post-sales technical services). Metalfrio’s competitive advantages are derived from global efficiency (excellence in operational processes) and tropicalized innovation (offer of products suited to emerging markets). Uncommoditizing Strategies by Mexican Firms Mexico is the second largest Latin American economy and twelfth globally with a GDP of US$ 2,157 billion PPP (World Bank, 2017). Since signing the General Agreement on Tariffs and Trade (GATT) in 1986 and entry into the North American Free Trade Agreement (NAFTA) with the US and Canada (1995), the Mexican economy has opened up to trade and foreign investment. With a GDP per capita of 8 US$ 16,988 PPP and the emergence of a new large urban middle class (driven, in some cases, by salaries offered by exporting manufacturers), a large domestic market has developed for products and services. This has incentivized startups of several companies in production and food distribution as well as retail chains and high street lenders. Additionally, more than 20 million Americans are of Mexican origin, which has encouraged companies to export and operate plants in the United States. For this study, we selected three Mexican companies: Bimbo, Gruma, and Elektra. Table 2b summarizes their sources of competitive advantage. *** Insert Table 2b about here *** Bimbo is a leader in the production, distribution, and marketing of bakery products worldwide. It ranks third among the most global Mexican companies. Bimbo operates in 22 countries in America, Europe, and Asia, with 163 plants and over 52,000 distribution routes. The company has successfully expanded its original Mexican business, based on offering “fresh bread and pastries everywhere all the time” with diverse product lines and a distribution network that allows bread to be present at every point of sale for consumers of all socioeconomic levels, in countries with diverse economic characteristics. Bimbo’s strategy is based on: (i) high-value products in leading brands to target consumers; (ii) exceptional manufacturing processes; (iii) continuous innovation for high productivity and efficiency; (iv) state-of-the-art distribution; and (v) marketing with disciplined financial management. US and Canada represent 53% of net sales, Mexico 34%, rest of Latin America 10%, and Europe 3%. From 2000 to 2015, Grupo Bimbo’s revenue increased almost fourfold. Its high profits are associated with maintaining the entrepreneurial vision of the founders through an outstanding and continuously strengthened distribution system, along with superior products resulting from a focus on innovation, R&D, and marketing efforts. Bimbo’s internationalization process is based on a combination of opening of manufacturing and commercial facilities, acquisitions (often keeping local brands) and alliances. Championing an approach of product diversification, the company offers more than 7,000 different articles, including loaf bread, pan dulce, bakery goods, pastry, cookies, confectionery, salted snacks, tortillas and toast. Because Bimbo’s global strategy is largely focused on efficient innovation, manufacturing, distribution and financial management processes, we suggest the company has developed this strategy primarily through global efficiency combined with elements of coordinated control and tropicalized innovation. Gruma is the global leader in corn and flour tortilla production and sales. Additionally, the firm is a leading producer of wheat flour and related products, such as flatbreads, pizza crusts, and wraps. Other Gruma products include rice, snacks, pasta, condiments and palm hearts. The company has grown globally by expanding to USA and Canada, Europe, Asia, and Oceania. The group is present in 112 countries and operates 79 production facilities (López-Lomelí & Gomez, 2018), with a successful portfolio of global brands (Maseca and Mission) and multiple local brands (e.g., Guerrero in the US; Tortiricas and Tosty in Costa Rica). Gruma was born from the opportunity that corn tortillas are highly appreciated as a staple in Mexican households of all socioeconomic classes; it is eaten every day by itself (like traditional bread) or in a wide variety of combinations. The company has grown globally by first offering corn products to Mexicans living in the United States. Later, it leveraged the global popularity of Mexican (or Tex-Mex) food to grow market share and finally become a global player in corn and wheat products using its successful Mexican business model to expand into emerging markets worldwide. Gruma has a strategy based on five pillars: (i) solid corporate strategic direction and organizational development; (ii) innovation; (iii) marketing; (iv) sustainability and technology, and (v) multi-market, multi-category and multi-target consumers. The company focuses on strategies to optimize product portfolio, distribution fleets, expansion into the most profitable products, optimization of marketing, advertisement and administrative costs, and in investment projects for value creation. This is combined with a solid strategic re-focusing on core businesses while divesting non-strategic businesses, and a clear and flexible structure. Given that Gruma’s strategy is focused on optimizing its mix of core products globally along with activities associated with the production and distribution of these products, we suggest the company has developed its strategy through coordinated control, global efficiency, and tropicalized innovation (local brands). Elektra is a retail company that has accomplished income and profit objectives using a credit program model that targets middle and base-of-the-socioeconomic-pyramid consumer segments in need of 15 During its first twelve years, Resemin concentrated on providing spare parts. However, Mr. Valenzuela, founder and current CEO of the firm, observed that despite the constant fluctuations in metal prices, the market for drilling equipment was unaffected, due to the emphasis on production rather than exploration (Roca, 2013). Mr. Valenzuela’s knowledge of Peruvian mining conditions, the network developed, and the accumulated knowledge on underground drilling equipment were decisive to expand Resemin’s scope in 2001 to begin manufacturing drilling equipment for underground mining (Roca, 2013). To compete in this line of business, the firm concentrated on design, quality, safety, and reliability (Dassault Systèemes, 2016). Further, considering the unique characteristics of Peru and the extreme mining conditions in which this type of machinery operates, Resemin emphasizes flexibility to adapt drilling equipment to mining company requirements. Their relatively small scale of operations and niche strategy allow the firm to respond to requirements that established multinationals cannot easily implement (Roca, 2013). As early as 2002, Resemin started to internationalize by following Peruvian customers. For instance, executives from Glencore (Peru) moved to Zambia in late 2001 and ordered Resemin equipment to operate there (Conexion ESAN, 2017). Similarly, in 2005, Hochschild (Peru) ordered Resemin drilling machines to operate in Argentina. While the design, manufacturing, and testing processes can be done in Peru, it is necessary to be close to the market to operate successfully in this industry. Therefore, the firm established foreign operations near its main customers. By 2016, the firm had wholly-owned subsidiaries in Argentina, Mexico, Zambia, Congo and India (Villalobos, 2017). Today, Resemin is the third largest company in underground drilling equipment worldwide. By capitalizing on its ability to adapt to customer needs in the field, Resemin has developed its uncommoditized strategy through tropicalized innovation. UNCOMMODITIZING STRATEGIES OF EMERGING MARKET FIRMS The comparison of case studies across industries and countries resulted in the identification of uncommoditizing strategies that these companies have been using to break away from commodity-based positions in global value chains as well as to break away from competition solely based on price. Figure 1 illustrates the three elements of these uncommoditizing strategies: tropicalized innovation, global efficiency, and coordinated control1. Each element has sub-elements that affect the overall abilities of companies to move away from price competition into the achievement of premium pricing for their products and services. Firms have undertaken different dimensions of this model according to the particular conditions of the countries and industry in which they operate and the companies’ idiosyncratic efforts. Table 3 summarizes the actions taken according to the classification of Figure 1, condensing the information provided in Tables 2a to 2f. *** Insert Figure 1 and Table 3 about here *** Tropicalized Innovation The first element is tropicalized innovation. By this term, we mean that emerging market companies have developed innovations that are particularly suited to the conditions of emerging markets. These innovations go beyond the diffusion and adaption of innovations from advanced economies to emerging ones (Rogers, 2010). Instead, they comprise both innovations that take into account the lower income levels of many consumers in emerging economies (Prahalad, 2005; Zeschky, Widenmayer, and Gassmann, 2011) as well as innovations that take into account the lower level of infrastructure available in emerging economies. Such innovations are well suited to the conditions of emerging economies of the country of origin and are thus applicable to other emerging economies, helping companies internationalize on the basis of innovations that are better suited to the large segments of low-income population. Although some may not be the basis for companies’ global expansion and their abilities to compete in advanced 1 We need to clarify the difference between our framework and the AAA framework (Ghemawat, 2007). Our framework focuses on the strategies taken by firms in emerging markets to upgrade their capabilities to international levels and move away from commoditized strategies in which competition is based on prices and products are undifferentiated. The AAA framework explains the advantages of multinationals as the result of three influences: adaptation (taking existing products and modifying them to fit the needs of new countries which the firms operate), aggregation (concentrating activities in few locations to benefit from economies of scale) and arbitrage (investing and transferring inputs and products across countries to benefit from differences in country endowments). 16 economies where such innovations may be unneeded, some may even be used in advanced economies in the form of reverse innovations (Govindarajan and Ramamurti, 2011). In the latter case, the innovations require a further adaptation to the conditions of advanced economies given that the initial conditions that prompted the innovation may not be widely prevalent in more advanced countries. These tropicalized innovations take two forms: product innovations that are adapted to local needs, and local brands that resonate with emerging economy consumers. Both of them enable emerging-market companies to break away from price-based competition and help them demand premium pricing for their offerings or be the preferred choice of customer or else reach satisfactory profitability from a better balance between costs (by sacrificing or reducing attributes that are not so much valued by emerging market customers) and price. Product innovations are tropicalized as the result of a better understanding by managers and engineers of customer needs in emerging economies. The challenge of developing tropicalized innovations is not only identifying the particular needs of poorer consumers, but rather finding business models and technology development processes that can generate products and services that meet and fulfill customer needs at a low price point without sacrificing functionality and features. Customers in emerging economies do not want a low-quality version of the products sold in advanced economies (Economist, 2017). Thus, innovation processes take into account such needs when developing products and services rather than taking existing products and trying to reduce features to meet the lower price point of emerging economy consumers. Local brands are developed in tandem with product innovations, with companies segmenting products that are well-developed and reliable. Emerging market consumers tend to have a preference for global brands from advanced economy firms as these signal higher quality and responsibility as well as enabling consumers to claim high status (Arnold and Quelch, 1998). However, firms in emerging markets can build reliable and reputable local brands (Chattopadhyay, Batra and Ozsomer, 2012) and use their deeper understanding of the local market to become credible global competitors (Dawar and Frost, 1999). Such segmentation is then used in diversification in which the company sometimes uses a general brand to introduce new products in emerging economies. Global Efficiency The second element is global efficiency. What we mean is that emerging market companies focus on improving their production and decision processes so that they can achieve efficiency levels above those of advanced economy companies. Focusing on global efficiency means that companies are not just relying on lower labor costs of emerging economies. They are going beyond lower labor costs and designing processes that, taking advantage of such lower labor costs, create products that are of high quality and superior reliability compared to those produced by competitors in the same country (Guillén and GarcíaCanal, 2009; Luo and Tung, 2007). The global efficiency is facilitated by the economies of scale that many of these companies have achieved as a result of dominance in their home country markets. They are also the result of a focus on increasing quality and achieving quality certifications that enable them to signal their differential ability to produce better products. Many firms use the quality certifications as a signal that they are superior suppliers of components or complete products for advanced country multinationals and customers. Moreover, the focus on global efficiency is also driven by the ability of these companies to control sequential process innovations, given that it is more difficult for competitors to imitate process innovations. This global efficiency helps them not only reduce production costs but also create products with fewer defects, helping them to achieve higher operating margins even if the products are sold at low prices. Moreover, it enables improvements in product quality and reliability and thus helps them demand premium pricing for their offers. Coordinated Control The third element is coordinated control. We refer to coordinated control as the ability of company managers to control the value chain and ensure that decisions are integrated and quickly implemented. Emerging market firms may start their upgrading process as suppliers in the global value chains of advanced economy multinationals, learning from these firms (Luo and Tung, 2007; Mathews, 2006). However, over time they move along the value chain into higher value-added segments, backward into R&D and technology development and forward into marketing and brand management, of the “smiling curve” 17 (Mudambi, 2008; Shih, 1996). This enables them to reduce their dependence on unreliable suppliers and distributors and the need to invest in additional control and monitoring in emerging economies given that contract enforcement in these countries is less efficient than in advanced economies (Khanna and Palepu, 2010). Also, such value chain control can also help these companies identify new ways of innovating and better serving customers (Pananond, 2015) that reinforce tropicalized innovation and global efficiency. Additionally, many of the companies are run by entrepreneurial managers, often the main owners, who feature an ability to manage operations efficiently to achieve desired objectives. Interestingly, some emerging market firms have developed that ability to control the value chain (backward and forward) even without having served advanced market firms, but because of the drive for profit and excellence of their entrepreneurial founders. Companies are quick to adapt to new customer demands and new market trends, with the firms quickly entering new and promising activities or geographies, as well as quickly exiting those in which they have not been able to achieve desired goals. Coordinated control links tropicalized innovation with global efficiency and ensures that companies can effectively implement uncommoditizing strategies. CONCLUSIONS In this article, we analyzed the processes followed by emerging market firms to upgrade their capabilities and achieve international competitiveness. We proposed that, although many emerging market firms are subject to commoditized competition in which they compete against other firms primarily on price with low-quality products, some firms have been able to break away from this pattern and develop uncommoditizing strategies. The analysis of eighteen firms in six Latin American countries illustrates how some firms have developed these uncommoditizing strategies, which are composed of three elements. First, tropicalized innovation, whereby firms develop innovations and brands adapted to the unique needs of emerging economies; this enables them to differentiate their products from those of other firms and sell at premium pricing and gain customer preference. Second, global efficiency, whereby firms achieve efficient processes that reduce production and operation costs and result in products and services that are more reliable and of higher quality, helping them to command premium pricing. Third, coordinated control, whereby firms achieve integrated control of the value chain and related activities and rely on speedy decision making to ensure rapid adaptation to new customer demands and an ability to foster tropicalized innovation and global efficiency. These ideas contribute to a better understanding of emerging market multinationals and their global expansion by focusing on the mechanisms that have enabled some of them to achieve international competitiveness, a requirement for international expansion. The literature on emerging market companies has focused much attention on the processes that these firms have followed in their international expansion (see, e.g., the classification of global strategies by Ramamurti and Singh, 2009, and the discussion of their internationalization in Guillén and García-Canal, 2009). A recent literature branch is focusing on how emerging market firms have managed to upgrade their capabilities in the first place (see the chapters in the book edited by Williamson et al., 2013) and specific analyses such as learning-by-doing (Rui, CuervoCazurra and Un, 2016), the challenges faced in integrating external technology (Cuervo-Cazurra and Rui, 2017), developing product innovations (Awate, Mudambi and Larsen, 2012), or the solution to human capital voids (Wang and Cuervo-Cazurra, 2017). We expand this literature by providing an overarching model that explains how emerging firms, in general, can develop uncommoditizing strategies to upgrade their capabilities, thus providing bridges to previous narrower studies. The findings complement other suggestions for escaping a commoditized market by advanced economy firms (e.g., Hax, 2009; Matthyssens and Vandenbempt, 2008; Riot, Chamaret and Rigaud, 2013). The framework presented here can be refined in future research by going deeper into each factor, using insights from the case studies to understand the processes better and develop more nuanced explanations of the mechanisms. The framework is useful for managerial guidance as it provides a comprehensive yet succinct overview of the main strategies that emerging market firm managers can use to help their firms achieve international competitiveness. Managers of emerging market firms need to follow the guidance that takes into account the challenges and limitations that their firms face from operating in emerging economies and being latecomers in the global arena. Thus, instead of imitating their advanced economy counterparts, these managers can benefit from following appropriate strategies to break from commoditized competition. These 18 are the focus on innovations that are specific to the conditions of emerging economies, achieving global efficiency, and maintaining control to ensure rapid adaptation. The framework can be expanded in future research, which can address some of its limitations. First, the ideas were based on the analysis of a wide variety of firms in six Latin American economies. These firms share commonalities in the transformation of the countries and level of development that facilitate the comparison of cases. At the same time, some of the ideas may not apply to firms in other emerging markets, particularly those that are close to international competition and thus have less pressure to upgrade capabilities to international levels (e.g., Cuba, North Korea, Venezuela) or those that are at a very low level of economic development and whose firms face large challenges in generating international capabilities (e.g., Afghanistan, Bhutan, Haiti). Hence, future research can analyze how to modify the model to explain the process used by firms in these extreme underdeveloped countries upgrade their competitiveness to international levels. Second, the analysis focused on the outcomes of a multiplicity of actions that enabled firms to achieve a level of international competitiveness. We did not go back in time to analyze the specific sequence of actions in the uncommoditizing strategy. Thus, some firms may start focusing on efficiency and quality in the process while others may start focusing on innovation in the products, and yet others may focus on achieving control. Or firms may start with two or three of the actions at the same time. Future research can take a process approach to the analysis of the uncommoditizing strategies to identify the paths that firms take to upgrade their capabilities and how the different paths may result in faster or deeper capability upgrading. Third, we focused on the strategies used by firms to upgrade their capabilities to international levels. One outcome of this upgrading was the internationalization of these firms, and they showed a wide diversity in levels of international expansion. We did not analyze the particular internationalization processes used by the firms and how the uncommoditizing strategies connected to these international expansions. Nor we studied how the strategies discussed lead to the development of advantages that can be used in particular countries. Future research can study in detail the paths followed by emerging market firms in their internationalization, whether they go to advanced economies or emerging markets first and what the subsequent expansions are, and how the tropicalized innovation, global efficiency and coordinated control facilitates these expansions. Future research can also analyze the role that these uncommoditizing strategies play on the motives for internationalization, whether firms expand abroad to sell more, buy better, upgrade or escape (Cuervo-Cazurra, Narula and Un, 2015). Fourth, we focused on the firms and did not pay attention to other characteristics such as ownership, industry, cluster or country that may play a role in the upgrading of capabilities. We also did not study the role that the government had on the development and transformation of these firms, or how country-specific advantages support the development of firm-level strategies (Chen, Li and Shapiro, 2016) nor how countryspecific disadvantages limit firm competitiveness (Narula and Kodiyat, 2016). Future studies can analyze how these and other conditions modify the three uncomoditizing strategies that we identified in the framework. 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Companies analyzed Company Industry Country Ownership Demand needs: global (G), local (L) Target buyer: organization (O), consumer (C) Sales, US$ m 2016 or latest Assets, US$ m 2016 or latest Labor, thousand EBIDTA, US$ m 2016 or latest Exports, US$ m 2016 or latest Countries with FDI Interviews and Data BRF Meat Brazil Publicly Traded L C 7,165 10,132 90.5 1017.3 2862.6 47 Director of M&A and Strategic Planning, 2013 Eurofarma Pharmaceutical Brazil Private firm G O, C 554.3 589.8 6.5 n/a n/a 6 International Area and Export Director, 2013 Metalfrio Commercial refrigerators Brazil Business Group G O 136.9 127.6 1.3 2.4 9.3 3 Director of Sales and Marketing for the Americas, 2013 Bimbo Bread Mexico Publicly Traded L C 13,839 80,219 125.4 1367 2603 21 Secondary data Gruma Corn Products Mexico Publicly Traded L C 1,680 2,573 NA 566 2689 11 Secondary data Elektra Retail/ Finance Mexico Publicly Traded G C 4,792 11,518 84.3 489 NA 7 Director of Finance and Investor Relations and Press Director. Grupo Salinas. Mexico City 2015. Globant Software/ IT consulting Argentina Publicly Traded G O 323 285 5.9 81 180 12 Talk at Universidad de San Andres by Martin Umaran (cofounder of Globant) in/2016. INVAP Nuclear/ Aerospace Argentina SOE G O 214 302 1.4 22 67 6 Secondary data Tenaris Steel Argentina Bus. Group – Publicly Traded G, L O 4,300 14,000 19.0 598 409 12 Secondary data Tahami Cultiflores Flowers Colombia Private firm G, L O 3.2 7.3 485 0.64 4.57 0 Secondary data Procafecol (Juan Valdéz) Coffee and coffee shops Colombia Publicly Traded GL C 81.88 47.4 1.65 7.00 (2015) 11.34 13 franchises Secondary data Corona Home improvement Colombia Bus. Group – Publicly Traded GL O, C 1.38 554.3 1.65 -0.4 102.8 6 Secondary data; Talk at Universidad de Antioquia by Hernán Mendez, President of Procafecol Colbun Electric power transmission Chile Bus. Group – Publicly traded L O, C 1,436.2 6,822.6 1.1 157.9 n/a 1 Secondary data Concha y Toro Wine Chile Bus. Group – Publicly traded G, L C 983.5 1,517.4 3.5 128.6 685.4 8 Secondary data Socovesa Construction Chile Publicly traded L C 513.2 1,290.9 5.8 102.6 n/a 0 Secondary data Gloria Dairy Peru Bus. Group – Publicly traded L C 1365 1187 2.0 146 6 . Former Marketing Manager. Secondary Data. Lolimsa Information Technology Peru Bus. Group. Privately held. G O 2 0.05 10 Secondary Data. Resemin Drilling equipment Peru Bus. Group. Privately held. G O 74 1.7 6 Secondary Data. Note: company figures of Brazilian companies were retrieved from: Exame (2016). 24 Table 2a. Sources of competitive advantage and uncommoditizing strategies of Brazilian firms BRF Eurofarma Metalfrio Industry Animal protein Pharmaceuticals Commercial freezers Differentiation Quality enhancement ● Intense, consistent and long-lived investments (e.g., feed rations, vaccines, hormones, raising techniques). ● Strict (though virtual) control of the value system (from the egg-producing farms to the animal (chicken and pigs) raising farms). ● Higher-quality chicken and pork packaged products with lower fat content, higher percentage of valueadded parts and additional flavors catering to local tastes ● Careful production processes guarantee the quality of drugs produced (mostly under outsourcing or licensing agreements) ● Innovation ● State-of-the-art technology and high quality ● Dependability (high MTBF – meantime between failures) ● Products designed to resist harsh conditions (extreme temperatures; fluctuation in electric supply) ● International certifications Added services ● Warehousing and commercial facilities to learn more about, and cater better to, foreign customer needs, when served through exports ● Frequent visits to and close relationships with physicians ● Prompt technical maintenance force ● Low downtime made possible by technical design that allows for quick change of defective parts ● Customized solutions Marketing-related ● Heavy and consistent investment in branding and promotion since early history. ● Abroad: acquired branded producers and kept their brands (e.g., Paty, Dánica, Bocatti). ● Launched a new brand – Perdix – abroad. ● Large portfolio of drugs makes the company more attractive to physicians and distributors. ● Recognition as a sustainable company ● Home country: invested heavily in relationships with its clients, which reinforces corporate reputation. ● Abroad: acquired several companies and kept their brands (Caravell, Derby, Klimasan) to exploit brand equity ● Intends to use its Metalfrio brand and has been exporting commercial refrigerators with this brand. Cost efficiencies R&D and technology (process) Research on the use of vaccines and hormones as well as animal feed R&D and technology (product) Operational processes ● Production and distribution excellence ● Economies of scale (in production, marketing, distribution, procurement, R&D) in Brazil and foreign markets ● Country-related cost advantages because of favorable weather conditions to chicken raising ● Economies of scale (in production, marketing, distribution, procurement, R&D) allowed by the large drug portfolio ● Economies of scale (in production, marketing, distribution, procurement, R&D, post-sales technical services) Managerial processes • Virtual control of value chain from egg production to chicken/pork-processing and branding • Reduced costs of whole value system (regarding R&D on feed, vaccines, hormones, as well as procurement) 31 Table 3. Uncommoditizing strategies in the cases analyzed Uncommoditizing strategy Country Company Global efficiency Tropicalized innovation Coordinated control Process innovation Quality program Economies of scale Adapted products Diversified offering Local brands Control of value chain Quick decisionmaking Brazil BRF x x x x X Eurofarma x X Metalfrio x x X Mexico Bimbo X X x x Gruma x x x X Elektra X x x Argentina Globant X x INVAP X x Tenaris x x X X Colombia Grupo Corona X Juan Valdez X Tahami Cultiflores X Chile Colbun x X Concha y Toro X X Socovesa x X Peru Gloria X x Lolimsa X X Resemin X Note: “X” denotes the main strategy employed, while “x” denotes a secondary strategy employed View publication stats