Rough diamonds

UGH

DIAMONDS

THE FOUR TRAITS OF

SUCCESSFUL BREAKOUT FIRMS

BRIC COUNTRIES

UYEN

LÍÉU SEUNG HO PARK

NAN ZHOU

GERARDO R. UNGSON

I5JOSSEY BASS

A Wiley Brand

____________________________________________________

ROUGH DIAMONDS

ROUGH

DIAMONDS

THE FOUR TRAITS

OF SUCCESSFUL BREAKOUT

FIRMS IN BRIC COUNTRIES

ATION

L-l

MJOSSEY-BASS'

RỌC THÁI NGUYÊN

M TÂ M H Ọ CLIỆU

Seung Ho ParR

Nan Zhou

Gerardo R. Ungson

Cover design by Adrian Morgan

Cover image: Copyright © Shutterstock

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Library of Congress Cataloging-in-Publication Data

Park, Seung Ho, 1960-

Rough diamor^ds^the four traits of successful breakout firms in BRIC countries /

by Seung Ho Park, Nlati Zhjpu, Gerardo R. Ungson.— First edition,

pages cm

Includes bibliographical references and index.

ISBN 978-1-118-58926-7 (cloth); ISBN 978-1-118-58922-9 (ebk.);

ISBN 978-1-118-58951-9 (ebk.); ISBN 978-1-118-58955-7 (ebk.)

1. Industrial m anagem ent— Developing countries. 2. Industries— Developing

countries. 3. Industrial policy— Developing countries. 4. Economic

developm ent— Developing countries. I. Zhou, Nan, 1982- II. Ungson, Gerardo R.

III. Tide.

HD70.D44P37 2013

658.4'06— dc23

2012048752

Printed in the United States of America

FUST EDITION

HB Printing 1 0 9 8 7 6 5 4 3 2 1

C opyright © 2013 by J o h n Wiley 8c Sons, Inc. All rights reserved.

Contents

Foreword, vii

John Q uelch

Preface xi

Acknowledgments xv

Introduction xvii

1 AN OVERVIEW 1

2 THE FOUR Cs OF HIGH PERFORMANCE 21

3 CAPITALIZING ON LATE DEVELOPMENT 31

4 CREATING INCLUSIVE MARKET SEGMENTS AND

NICHES 47

5 CRAFTING OPERATIONAL EXCELLENCE 65

6 CULTIVATING PROFITABLE GROWTH 87

7 HOW ROUGH DIAMONDS AVOID THE GROWTH

FETISH 109

8 HYPERGROWTH: CAN IT BE SUSTAINED? 133

v

VI CONTENTS

9 NATIONAL DIFFERENCES: A TALE OF FOUR

COUNTRIES 149

10 RESPONDING TO ROUGH DIAMONDS:

IMPLICATIONS AND RECOMMENDATIONS 167

Appendix: Methodology 181

Notes I 99

The A uthors 205

Index 207

Foreword

F

or those few skeptics w ho still w ondered how far-reaching

an im pact the w orld’s developing m arkets will have on

th e global econom y, the recen t recession provided a pretty

com pelling answer. Even as the advanced m arkets in N orth

A m erica and E urope stum bled into recession from 2007 to

2009, and in som e cases beyond, em erging m arkets continued

to post significantly higher growth rates— collectively, as m uch

as 5 percentage points higher.

By now, the prim ary debate ab o u t the potential o f develop￾ing econom ies has shifted from the discussion o f w hether they

will continue expanding to discussions about how fast they will

grow an d for how long they can sustain these rem arkable rates.

T h e w orld’s top m ultinationals have already recognized the key

role th at developing m arkets will play in their futures. Brazil,

Russia, India, an d C hina (BRIC) have becom e the w orld’s m ost

sought-after m arkets, draw ing new com panies and investm ents

with a com bination of sizable populations, rising incom es,

developing m arket institutions, an d em erging m iddle classes.

For businesses, sustained grow th in these BRIC m arkets is a

V I1

viii FOREWORD

foregone conclusion, a given that has led m any to look for even

new er growth m arkets in Africa, the M iddle East, an d South

Am erica and across m uch o f Asia.

No do u b t m ultinationals from aro u n d the world will con￾tinue to play a critical role in the o ngoing progression of the

BRICs and o th er em erging econom ies. After all, the countries

that have cut them selves off from the global econom y and o u t￾side investm ents have seen th eir econom ies suffer for it. Yet

no national econom y can thrive on outside investm ent alone.

Inevitably only the contin u ed rise o f dom estic com panies, reli￾able m arket institutions, an d a com bination o f dom estic and

international trade can sustain the developm ent o f these key

em erging econom ies.

T he developing BRIC econom ies can boast a grow ing ros￾ter of hom e-grow n cham pions that are leading the way. T he

likes o f Tata (India), G azprom (Russia), Sinopec (C hina), and

Petrobras (Brazil) have long established them selves as globally

recognized brands. They challenge even the greatest o f m ultina￾tionals in term s o f expertise, innovation, an d leadership in th eir

industries. T hey’ve set the standard for business in em erging

m arkets. They are the vanguard.

They are not, however, the ticket to b ro ad er econom ic

developm ent, at least no t on their own. T h e tru e pow er th at is

fueling genuinely sustainable growth in these m arkets is com ing

from the large bu t often overlooked tier o f successful com panies

an d brands that, while n o t yet household nam es worldwide,

have posted long-term growth rates far h ig h er than those o f

m ost o f th eir counterparts in both em erging an d developed

econom ies. These com panies, including the rough diam onds

identified in this book, provide the sup p o rtin g found atio n

Foreword IX

o f dom estic growth that necessarily underpins the ongoing

developm ent o f a b ro ad er m arketplace and increasingly robust

econom y in their hom e countries.

Yet their im pact ripples well beyond the people they employ,

the products they develop, and the production they contribute

to the national and global econom ies. These com panies raise

the bar for both public and private entities. T heir business

dem ands force governm ents an d regulatory agencies to estab￾lish a fram ework that sustains an d enhances developm ent. T heir

innovation forces staid old com panies to raise their gam e if they

want to rem ain com petitive. T h eir ever-increasing quality raises

both the expectations and the capabilities of th eir custom ers.

And in many cases, th eir progressive m anagem ent and world￾class leadership vastly im prove workplace standards and worker

productivity across en tire industries.

This sort o f fundam ental developm ent, if it is to take a solid

foothold in em erging econom ies, m ust com e from within. It

has to grow organically, so it can accom m odate the idiosyn￾crasies o f each individual country— its history, culture, and

political ecosystem. No d o u b t the global econom y has helped

establish m arket institutions an d standards of com m erce that

benefit businesses in any participating nation. Yet within each

nation and each dom estic m arket, this tier o f long-term growth

com panies will provide the tru e foundation for a sustainable

econom ic developm ent.

Perhaps the only g uarantee for these em erging econom ies

is that global and dom estic forces will arise to challenge their

growth. Recessions will occur. M arket institutions will stum ble.

Regulations will fail. A nd businesses will rise and fall. It’s hum an

n ature and it’s the fundam ental nature of hum an econom ies.

FOREWORD

But the stronger the foundation o f com panies with established

business m odels and long-term growth histories is, the b etter

these developing econom ies will w eather the storm s and the

m ore they will thrive in the good times.

Jo h n Q uelch

Harvard Business School

Preface

A

cross from the Beijing offices o f the SKOLKOVO Busi￾ness School-E rnst & Young Institute for Em erging Market

Studies (IEMS) is Olympic Park, the site of the 2008 Sum m er

Games. Every day tourists an d o th e r visitors stream through the

park to look at the fam ous Bird’s Nest and W ater Cube. Some

take pictures in front o f these two buildings, while others simply

w ander around, appearing co n ten t to recreate the m om entous

events o f that sum m er. Tourists who are asked why they flock

to those buildings rarely talk about the buildings themselves.

“ T h at is w here Mark Phelps won his Olympic record eight gold

m edals,” they say, or, “ T h at is w here Usain Bolt ruled in the

100-meter dash.”

People rem em ber winners. In sports bars around the world,

people quiz their friends about Super Bowl titlists, W orld Series

cham pions, and W orld C up winners. They rem em ber Spain’s

run in the W orld Cup. They can recite the years the San Fran￾cisco 49ers won the S uper Bowl, or how m any cham pionships

the New York Yankees have won in their illustrious history.

Ask them who finished second, and m ore often than not, you

xii PREFACE

get silence in return. T he occasional success still gets its due

recognition, but the key places in o u r m em ory are held by those

who build a record of sustained success over time. We rem em ­

b er the dynasties. It should m ake perfect sense, then, that this

h ap p en s in the business world too. Successful com panies fill

the m ajor plank o f attention and analysis. G oogle, Microsoft,

A pple, Facebook, and o th er leading firms receive the highest

m arks in credit and brand recognition.

Each generation has its own list o f legendary icons, but a

definitive answer to what sustains high levels o f perform ance

rem ains elusive. Perhaps we focus too m uch on the dow nstream ,

gazing at already-successful firms. We certainly ten d to pay less

atten tio n to the upstream , seeking the early-stage differentiation

th at eventually separates the w inners from the losers. W hich of

those firm s will take their place in the next dynasty o f m arket

leadership? Have they already sowed the seeds of that future

success?

T hese questions led us to the rough d iam onds— the em erg￾ing m ark et’s m ost prom ising but still developing firms.

T h e kernel of this search began a few years ago when

a g ro u p o f respected en trep ren eu rs founded a new busi￾ness school, Moscow School of M anagem ent SKOLKOVO, to

develop future business leaders in Russia and o th e r em erging

m arkets. T he idea o f rough diam onds surfaced w hen Seung H o

Park started building a new think tank in collaboration with the

school: th e SKOLKOVO Institute for E m erging M arket Stud￾ies. Since the ushering in o f free m arket reform in em erging

m arkets in the early 1980s, a cadre o f firm s— G azprom and

R osneft (Russia), Infosys T ech an d Tata C onsultancy (India),

P etrobras an d E m braer S.A. (Brazil), and Sinopec an d China

Telecom (C h in a)— had received a great deal o f attention from

the academ ic and business press. A nd rightly so: they’re great

P re fa c e X lll

com panies. Blit Park and Wilfried V anhonacker, (he fo unding

dean o f the SKOLKOVO Business School, w ondered what busi￾nesses would be in the next generation of successful firms. Can

em erging m arkets produce the next business dynasties?

Over the next three years, Park and the IEMS research

staff initiated the rough diam onds project with help from the

Ernst 8c Young field offices in the BR1C countries (Brazil,

Russia, India, and C hina). T he m ethodology they em ployed

was stringent and m eticulous, so it took som e tim e before a

com m on set of end u rin g patterns em erged that accounted for

sustained, profitable growth in all four countries. It is this story

that unfolds in detail in this book.

We could no t have finished this project w ithout the inspi￾ration o f the exem plary business leaders in these em erging

m arkets. In particular, we owe deep gratitude to Ruben V arda￾nian, a highly respected e n tre p re n eu r in Russia and a visionary

leader o f the SKOLKOVO Business School project. T h e global

leadership and un b o u n d ed support of Ernst & Young help ed

see this project through to the end. T he final phase o f the

project could no t have been accom plished w ithout the invalu￾able assistance o f the editorial team atJossey-Bass: K atherine D.

Davies, Dan Zehr, Kathe Sweeney, Alina Poniewaz-Bolton, and

Susan Geraghty. They were pivotal in facilitating the process

and rew riting m uch o f the original m anuscript, which was laden

with academ ic terms, into a readable and accessible final book.

Finally, we could n o t have accom plished a task o f such

m agnitude w ithout the en d u rin g counsel an d constant inspira￾tion from o u r families. Ja Young, A lexandra, and Amelia Park

patiently went through th eir activities while Seung H o Park took

off on freq u en t trips to em erging countries while w orking on

this project. Nan Zhou thanks h er family m em bers, especially

Yawei W ang, Shuiqing Zhou, and Jiajing Zhang for helping