HBR On Strategy: Scaling a Startup in Emerging Markets

Release Date: November 27, 2024 | Host/Author: Harvard Business Review

Introduction

In the episode titled "Scaling a Startup in Emerging Markets," Harvard Business Review's Andy O'Connell engages in a profound conversation with John Julins, a partner at Booz & Co. and co-leader of the firm's engineered products and services practice in China. This discussion delves into the intricate dynamics faced by fast-growing companies in emerging markets as they strive to compete both locally and globally. Julins brings his extensive experience in corporate and business unit strategy to unpack why many emerging market companies falter when transitioning from local champions to global contenders.

Understanding the Slowdown in Emerging Markets

[02:24] John Julins:
"What you're trying to accomplish and what you're focusing on changes as you move through different stages."

Julins begins by addressing the current narrative around emerging markets, particularly focusing on the perceived slowdowns in regions like China and India. Contrary to popular belief, he asserts that these slowdowns are not indicative of a fundamental shift in the markets themselves but are largely influenced by the investment community.

• China's Slowdown: Governed by capital controls, China's economic slowdown is policy-driven, aimed at transitioning from an emerging to a developed economy. This is a strategic move to navigate the middle-income trap, ensuring sustainable growth by deliberately decelerating the economy to build robust foundational capabilities.

• India's Slowdown: In contrast, India's slowdown is attributed to the inflow and subsequent outflow of hot money, reflecting more volatile investor sentiments rather than structural economic reforms.

Julins emphasizes that these slowdowns are part of a strategic evolution rather than mere economic downturns.

Transitioning from Local Champions to Global Competitors

[03:48] John Julins:
"Companies need to lay the strategic foundations for long-term success early on or risk flaming out."

A critical challenge for large companies in emerging markets is the dual role they play:

1. Pioneers in Home Markets: These companies are often the first to produce and market products such as appliances, cars, and computers locally. Their success stems from a bold vision, risk tolerance, flexibility, and speed.

2. Competing Globally: Simultaneously, they must contend with mature and well-resourced global competitors. This requires a systematic approach to developing capabilities that match those of established international players.

The crux of the issue lies in balancing these dual roles. Many companies in emerging markets focus heavily on rapid execution and securing first-mover advantages but neglect the strategic foundations necessary for long-term competitiveness. This imbalance often leads to sudden and unexpected failures.

Case Studies: BYD vs. Great Wall

BYD: An Overextension Example

[05:40] John Julins:
"BYD very aggressively invested in that and probably overinvested in that."
(Timestamp: 05:40)

• Foundation and Growth: Founded in 1995 as a low-cost lithium-ion battery manufacturer, BYD successfully ventured into the automotive industry around 2002-2003 with a bold vision to lead both the Chinese and global markets by 2015 and 2025, respectively.

• Overinvestment: BYD's aggressive expansion included overinvesting in capacity and vertically integrating its operations. Initially successful, the company's strategy relied heavily on copying established models (e.g., the F3 derivative of the Toyota Corolla) and securing significant investments, such as those from Warren Buffett.

• Challenges: Overextension led to difficulties in capacity management and building a robust retail network, ultimately resulting in operational troubles and unsustainable growth.

Great Wall: A Gradual and Sustainable Approach

[07:25] John Julins:
"Great Wall was much more gradual, much, much slower and much more deliberate."
(Timestamp: 07:25)

• Foundation and Growth: Established earlier in 1984 as a vehicle repair collective, Great Wall gradually integrated into the automotive sector with a focus on pickup trucks and SUVs—segments underserved in China at the time.

• Strategic Partnerships: Unlike BYD, Great Wall leveraged partnerships with foreign companies to build its capabilities systematically, avoiding overinvestment and ensuring sustainable growth.

• Global Expansion: By focusing on being strong first and then bigger, Great Wall maintained a balanced approach, leading to its status as a leading domestic player with successful international ventures.

Stages of Corporate Development in Emerging Markets

[08:42] John Julins:
"There are at least four stages, and each one is quite different in terms of mindset and capabilities."
(Timestamp: 08:42)

Julins outlines a four-stage framework for the development of large corporations in emerging markets:

1. Seize the Moment: Identifying and capitalizing on immediate opportunities to enter the market.

2. Build Strength: Developing foundational capabilities and strengthening internal processes.

3. Scale Up and Consolidate: Expanding operations while consolidating market position and optimizing efficiency.

4. Move Up and Out: Transitioning to global markets and establishing a presence internationally.

Each stage demands a distinct strategic focus and the cultivation of specific capabilities, emphasizing the need for a balanced approach between growth and capability-building.

Lessons for Leadership: Laying Strategic Foundations

[09:56] John Julins:
"You have to be very aware of where you are in these stages."
(Timestamp: 09:56)

For companies aspiring to transition to global competitors, Julins offers the following insights:

• Self-Assessment: Leaders must evaluate the maturity of their capabilities and identify their current stage within the four-stage framework.

• External Awareness: Understanding how the industry and economy are evolving is crucial for strategic alignment.

• Balanced Focus: While pursuing growth and market share, companies must emphasize internal capability development to ensure long-term sustainability and competitiveness.

Julins underscores the importance of strategic foresight and deliberate planning in navigating the complexities of scaling in emerging markets.

Global Patterns: Beyond China

[11:06] John Julins:
"You see variations on the same theme over and over again."
(Timestamp: 11:06)

Julins observes that the patterns of corporate development and strategic challenges are consistent across various emerging markets, including South America, other parts of Asia, and notable companies like Embraer, Cemex, Bimbo, Huawei, Lenovo, and Haier. These companies exemplify the successful transition through the four stages by:

• Balancing Growth and Capability-Building: Ensuring that expansion does not come at the expense of foundational strength.

• Leveraging Partnerships: Collaborating with foreign partners to enhance capabilities and enter new markets.

• Gradual and Systematic Expansion: Avoiding overextension by scaling operations deliberately and sustainably.

Strategy vs. Opportunism: The Role of Capabilities

[12:28] John Julins:
"It's about laying a foundation that allows you to be successful later."
(Timestamp: 12:28)

Addressing the tension between maintaining agility and adopting a structured strategy, Julins clarifies that capability-building and opportunism are not mutually exclusive. He delineates how companies can integrate both aspects across the different stages:

• Early Stages (Seize the Moment): Focus on opportunism by quickly identifying and capitalizing on market gaps. This phase leverages local knowledge and adaptability but often results in a patchwork of quick fixes and mismatched capabilities.

• Later Stages (Build Strength and Beyond): Transition to a strategic focus, establishing foundational capabilities and fostering systematic processes to support sustainable growth and competitiveness.

Julins emphasizes that the true "magic" lies in building robust capabilities that underpin long-term success, rather than relying solely on speed and opportunistic maneuvers.

Conclusion

The episode "Scaling a Startup in Emerging Markets" offers a comprehensive exploration of the strategic challenges and opportunities faced by companies in emerging economies. Through insightful discussions and illustrative case studies, John Julins articulates the critical need for balanced growth and capability-building. Emerging market companies must navigate the transition from agile, opportunistic pioneers to structured, globally competitive enterprises by laying strong strategic foundations early on. This nuanced approach ensures resilience and sustained success in both local and international arenas.

Notable Quotes:

• John Julins [05:40]:
  "BYD very aggressively invested in that and probably overinvested in that."

• John Julins [07:25]:
  "Great Wall was much more gradual, much, much slower and much more deliberate."

• John Julins [09:56]:
  "You have to be very aware of where you are in these stages."

• John Julins [12:28]:
  "It's about laying a foundation that allows you to be successful later."

Further Resources

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