Via the European Financial Review, an interesting look at four strategies for disrupting markets and building brands being used by emerging market multinationals:

In the past decade, a new breed of challenger businesses and brands has burst upon the world stage. Below, Amitava Chattopadhyay, Rajeev Batra, and Aysegul Ozsomer discuss how emerging market multinational corporations need to build global businesses and global brands

In the past decade, a new breed of challenger businesses and brands has burst upon the world stage, and in many categories— such as appliances, automobiles, consumer electronics, mobile phones, computers, personal-care products, telecommunications equipment, and beer—has built up significant new branded businesses with a broad international footprint.

“The main reason for the recent global growth is simply that many of these EMNCs have the ambition, vision, and confidence to want to become global giants themselves.”

These new multinational corporations (MNCs)—with names such as Acer, Arçelik, Apollo Tyres, Bharti Airtel, Bimbo, Bright Food, Geely, HTC, Haier, Huawei, LG, Lenovo, Modelo, MTS, Natura, SAB-Miller, SAIC Motor Corp., Tata Motors, Tata Tea, Ulker, and Vitra—are not from the United States, Europe, or Japan, the “triad” nations from which large MNCs typically come. Rather, they are from countries such as China, India, Brazil, Russia, Turkey, South Africa, and Mexico, all relatively poor countries with per capita incomes of around US$10,000 or less, as compared with incomes of US$34,000 or more for the most developed (G7) countries. These countries are known more for firms that produce inexpensive products of dubious quality or for firms that serve as contract manufacturing sources to the more dominant triad-based MNCs (the TMNCs), rather than for firms with world-class branded businesses that are viable competitors on the global stage. Today, however, the emerging market MNCs (EMNCs) listed above and others (e.g., Hyundai Motors and Samsung Electronics) are strong, profitable, branded players that have managed to wrest significant share away from much larger TMNCs—even though they started out small and disadvantaged, with very limited budgets, commodity products, and poor-quality perceptions.

Such EMNCs face two key challenges: they need to build global businesses, and they need to build global brands. In building their new global branded businesses, these EMNCs have had much to overcome. Yes, they often have lower-cost labor and manufacturing facilities to take advantage of, and they often have the advantage of high economies of scale from large domestic market volumes. However, they usually do not have the deep pocketbooks (or easy-to-tap capital markets) of their TMNC competitors, work with less-developed managerial systems and knowledge bases, and typically face more skeptical consumers and customers when they proclaim the high objective quality of their products.

Why Are These EMNCs Pursuing Global Growth?
The main reason for the recent global growth is simply that many of these EMNCs have the ambition, vision, and confidence to want to become global giants themselves. They have learned about developed-country market needs through their supplier contracts. They have now acquired, licensed, or innovated the needed technological competencies. They have established the quality-control, management, and supply chain processes and routines needed to run global operations and now are eager and prepared for the next stage of the game. Put differently, these firms have moved from purveying commodities to adding and capturing value with consumers through the appeal of their brands.

Building Global Businesses: Four Types of Strategies
In our research, we have identified four types of strategies these EMNCs use as they go about building their global businesses. The four strategies differ in their approaches to markets and competencies. The first difference is the market focus of the internationalization strategy. Some EMNCs primarily focus on similar emerging markets, where success is likely to be achieved more easily and quickly. Others, however, take the leap of focusing on less familiar and dissimilar developed markets, where success is less assured and will take longer to achieve.

The second difference is the degree to which the firms rely for their success on existing strategic competencies such as low-cost leadership. Some deploy these competencies to extend the firm, an approach we label mechanistic expansion. Others extend themselves through the deliberate development of new capabilities such as R&D, product design, brand management skills, and broader management processes and systems, an approach we label dynamic evolution.

“Some EMNCs primarily focus on similar emerging markets, where success is likely to be achieved more easily and quickly. Others take the leap of focusing on less familiar and dissimilar developed markets, where success is less assured and will take longer to achieve.”

The four types of strategies we identify, as a function of the consumer segments and markets targeted and the strategic competencies deployed, are as follows:

• Cost Leaders leverage existing low cost structures and large-scale volumes to extend their reach into developed markets.
• Knowledge Leveragers tap their existing resources and knowledge of home consumers and market to build branded businesses in other emerging markets.
• Niche Customizers combine their cost advantages in manufacturing with newly developed low-cost R&D capabilities to develop customized niche-segment branded offerings in other emerging markets.
• Global Brand Builders take their low-cost manufacturing and R&D capabilities to build branded businesses in developed markets through focused innovation that is targeted at specific products and segments.

Cost Leaders
Turkey’s Arçelik (Koc) owns more than 50 percent of Turkey’s large appliance market, while India’s Mahindra Tractors—because of its dominance of India’s huge tractor market—is now the largest tractor manufacturer in the world in terms of units sold. EMNCs like these have created large-volume operations in their home countries by serving their large domestic markets and doing contract operations for overseas buyers, giving them huge economies of scale on top of the low manufacturing and assembly labor costs of their home countries. These EMNCs also have mastered the frugal and lean business models necessary to flourish in their low-price home country markets.

“Cost Leaders leverage existing low cost structures and large-scale volumes to extend their reach into developed markets.”

Knowledge Leveragers
India’s Mahindra & Mahindra and Tata Motors both market vehicles overseas that build on their deep knowledge of how to create tough, rugged vehicles that less affluent consumers seek and that perform, notwithstanding the bad roads and rudimentary service facilities that characterize emerging markets; and India’s Asian Paints markets paints and coatings that offer a reliable and durable solution that consumers seek for the less-well-built homes that are typical of emerging markets. We call such EMNCs the Knowledge Leveragers. These EMNCs are applying to other emerging-market environments their home-grown knowledge of emerging-market conditions and the needs and limits of poor emerging-market consumers.

Niche Customizers
This third type of strategy focuses on small, neglected, and special-needs segments primarily, but not exclusively, in developing markets. Thus we see Mahindra Tractors use its knowledge of small but rugged tractors to go after hobby farmers and golf course and lawn maintenance segments in the U.S. and Australian markets. Niche Customizers take advantage of their cost structures to adapt and customize, given (1) their self-owned and, therefore, more flexible manufacturing facilities and (2) their own lower-cost “frugal innovation” R&D abilities, on a small geographic scale.

Such niche customizing also means that the marketing and brand building by such EMNCs is characterized by authenticity and truth: they are building on skills they genuinely possess, which makes it easier for them to speak credibly and consistently to both external and internal audiences. “We sell an honest product at an honest price,” says Mahindra & Mahindra executive director and group board member Arun Nanda, speaking about the company’s superior delivery of functional, no-fuss vehicles.

“Global Brand Builders build their own brands via focused innovation: a strategy of developing innovative technologies and products, but only in very narrow slices of the market.”

Global Brand Builders
One of the exciting findings of our research is the new class of EMNCs we call Global Brand Builders. These firms build their own brands via focused innovation: a strategy of developing innovative technologies and products, but only in very narrow slices of the market. HTC has built up a branded reputation among knowledgeable “prosumer” consumers worldwide as the “quietly brilliant” smartphone company that leads in new and better Android and Windows-Mobile phone products.

Focused Innovation. Global Brand Builders engage developed economies and markets on the basis of lower manufacturing costs and lower-cost home-based R&D (supplemented by licensing-in or overseas acquisitions of needed technical and design skills). These Global Brand Builders invest more in R&D than EMNCs typically do (Samsung Electronics, for example, invests 5.5 percent of its sales in R&D, a percentage almost as high as that of IBM) and take advantage of the lower cost of R&D in their home mar- kets and their own manufacturing skills. Such Global Brand Builders, by leveraging focused innovation, can then go to scale on a large number of new products and services that can compete with the offerings of larger-budget TMNCs.

HTC, as discussed earlier, is now the world’s third biggest smartphone manufacturer. It is now known for its innovations in leading-edge hardware design and easy-to-use user interfaces in this consumer electronics category. Once just a faceless “original design manufacturer” supplier of digital agendas (PDAs) and smartphones to Western multinationals such as HP/Compaq and Palm, with healthy but unspectacular margins, it now wants to be seen as the ease-of-use leader in the category. By 2010, it had achieved operating profit margins on par with that of RIM (BlackBerry), over 16 percent.

Or consider Mahindra & Mahindra, which moved from being a manufacturing partner for Ford in India to developing—from scratch, it says—its own Scorpio sport utility vehicle (SUV), giving it the confidence that it could compete with global players in the SUV and pickup truck corners of the global automotive category. Mahindra & Mahindra claims the Scorpio was developed for $120 million, one-fourth of what it would cost in Detroit.

However, cognizant of their still-limited resources, these EMNCs focus tightly on innovation, aiming at particular slices of the relevant global product market, such as HTC’s focus on smartphones with just Android or Windows-Mobile operating systems; Vitra’s focus on bathroom interiors; Ranbaxy’s focus on improved drug delivery and branded generics, but not new molecules; Mahindra & Mahindra’s focus on SUVs and utility vehicles; and Natura’s focus on identifying and extracting natural active ingredients from Brazilian flora traditionally used by the indigenous peoples of Brazil.

“We are witnessing in 2011 the quantum leap to a qualitatively different type of EMNC: one that competes not only on low costs and high-volume manufacturing and but also to use innovation as the foundation for attention-getting, image-changing brand building.”

What’s New About the “New-Wave” Business Strategies: Global Brands
The EMNCs we spoke with recognize well that businesses with strong brands are able to launch into a “virtuous cycle” of higher profits that businesses without strong brands cannot reach. With higher profits they can more easily create innovative and differentiated higher-priced products. To quote Hüsamettin Onanç of Turkey’s Vitra: “Brands are very important. If you are not a brand, you cannot capture the value-added sufficiently. There are enough commodities in the world. At the moment you can buy similar products from China at half price. They are nice imitations. You can also buy them from Egypt. There are always people who make them cheaper than us. That’s why it’s a 100% must for us to be a brand.”

Arçelik’s Hasan Subasi, former vice chairman and board member, draws similar conclusions about why and where branding matters most, based on very insightful segment-specific analysis: “There are three segments in the market [referring to the Western European appliance market]. First: the premium segment. This typically makes up 20% of the market, and branded goods are sold in this segment. Second, there is the mass market which is 50% of the whole market. Here, alongside a brand, the price becomes an important dimension. Finally, there is the economy segment. Generally, this makes up 30% of the market, and the prevailing dimension of the product is price. Nobody looks at the brand; the good which is cheaper sells more.

“If you go into the no-brand market at the entry level, as Arçelik did when entering the European market, even if you acquire the whole segment, you only reach 30% of the market. Not to mention that since it is the entry level, it is most open to competition. Tomorrow when a Chinese firm comes and offers a price $10 lower, your market share instantly drops. Entry level is the level with lowest sustainability.

“EMNCs recognize well that businesses with strong brands are able to launch into a “virtuous cycle” of higher profits that businesses without strong brands cannot reach.”

“If you want to go after a sustainable market, you should enter the mass and premium markets. Brands are important in these segments and serve two functions. First, it provides access to a large market; if you don’t have a brand then it means you are limited to 30% of the market (economy segment). Second, it determines your margins. While you are earning 12–15% in the premium segment, mass market brands earn 3–5%, and no-brands earn only 1–2% profit. That low! Therefore, a brand first increases the volume and secondly improves the margins. As long as you have a brand—if you have a strong brand—you have a sustainable business.”

We are witnessing in 2011 the quantum leap to a qualitatively different type of EMNC: one that competes not only on low costs and high-volume manufacturing, as well as emerging-market knowledge and skills, but also on its ability to innovate and lead in tightly focused product-market spaces—and to use such innovation as the foundation for attention-getting, image-changing brand building. And this competing-from-below business strategy is worth considering by challenger businesses everywhere.