Esteban R. Brenes
INCAE
E
conomic and commercial changes taking place at the The reduction of trade barriers, the liberalization of econo-mies, and the subsequent change in the structure of industries national and international levels have importantimpli-cations for the Latin American enterprise. Economic have all affected the level of competition in Latin America. This in turn has substantially heightened pressure on both liberalization, real exchange rates, reduction of trade barriers,
and vanishing protectionism allow for the penetration of inter- local companies and on multinationals located in the region that are interested in developing new strategies for competing national competitors in domestic markets with equal
condi-tions, intensifying business rivalry. This is no doubt a basic in local, regional, and international markets. In recent years, we have observed different ways of competing in each of these reason for the greater interest that we have noted on the part
of Latin American businesses in redefining their competitive markets, and although the individual company strategies vary widely, we may group them into four general categories for strategy, as we see in the cases selected for this special issue.
The fundamental objective of formulating and implement- analysis: national defense; alliances between local competitors; creation of real competitive advantage at the local level; and ing a business strategy is to ensure higher return on investment
in the long term. This competitive advantage should be unique going international, regional, or global. and depend upon a range of key elements whose objective is
to make imitation difficult for the competition. Both high and
National Defense Strategy
low performing companies can be found in all industries,
independent of how attractive these industries may be. This This strategy is used by Latin American companies to defend clearly demonstrates that the success of a business will depend their local market through the active promotion of protection-on the cprotection-oncrete actiprotection-ons it takes to compete, not protection-on the average ist policies. They lobby for governmental and congressional profitability level of its industry. support in keep tariffs high and to impose nontariff barriers on The history of economic development in Latin America international trade, thus restricting the entrance of imported has been marked by policies of import substitution during goods and services into the country or at least making their much of the twentieth century, as a means of spurring industri- prices prohibitive for local consumers.
alization throughout the region. This translated into greater The arguments commonly used to support this strategy levels of protectionism, including high tariffs, nontariff barri- are based upon the unfair advantage of large multinational ers, and licensing, which in the majority of cases promoted companies. These arguments include fears about the impossi-the development of local businesses with low levels of interna- bility of competing against multinational giants and about the tional competitiveness. Indeed, in the past, doing business threat that they will come in and buy up or destroy local successfully was relatively simple when compared with other businesses and the employment they generate. Such argu-parts of the world or to the same region today. Almost anything ments are appealing to many political factions. They are useful was good business since both the competition and consumer for labor unions and may be convincing to the public at large options were totally limited. The case Turri S.A. (Paladino that has never had the opportunity to exercise choice in daily and Almaraz,1994) included in this special issue, describes consumption. Throughout the years, this strategy has been past and present economic development strategies in Latin common practice in the Latin American business environment America by using Argentina as an example and clearly traces under the import substitution model. Today, it is used by the implications of these policies for management at the com- businesspeople and managers who have not been able to
pany level. anticipate the impact that free market forces and trade
liberal-ization would have on their industrial sector. As a result they have no other recourse but to resist the change by fighting
Address correspondence to E.R. Brenes, INCAE, P.O. Box 960, Alajeula,
Costa Rica. to keep international competition from penetrating the local
Journal of Business Research 50, 3–7 (2000)
market with the hope of securing protection for a few more tition even before this materialized (La Chira Corporation, years. This strategy, when used by private sector associations INCAE case #19018 by Esteban R. Brenes y Sara Cordero) with strong political influence, has been successful in pro- and Grupo Taca, which in 1994 initiated first an alliance and longing protectionist policies in some countries. then a merger of Central American airlines. There are also cases From a pragmatic business perspective, the use of national of alliances or collaboration for the purpose of penetrating the defense as a strategy is absolutely valid as a means of maximiz- regional or global market as described in the Carrier de Mexico ing profits. Businesspeople naturally will attempt to eliminate case, where two local air conditioning firms merged with the or reduce the level of competition that must be faced, and participation of a multinational company to penetrate the local whoever claims the contrary has probably never had to meet market; and in the Consorcio Ferrex case, where six Chilean a payroll. Thus, the pursuit of a national defense strategy is hardware manufacturers form an alliance to penetrate the U.S. understandable, although we must recognize that both the and Caribbean markets. These last two cases are included in country and the consumers may suffer the consequences of this special issue.
inefficiencies resulting from a lack of competition, such as high The rise of alliances and mergers at the Latin American prices, less variety, lower levels of service, and poor quality. regional level occurs in response to the pressure of facing new Given the circumstances surrounding international trade competitors that are much larger and have greater economies today, a national defense strategy cannot be considered sus- of scale, thus making it important to match size with size and tainable since experts consider that trade liberalization is a secure the largest share possible of the local market. This reality in the long term. The valid question is not why to creates barriers to entry and keeps multinational companies embark upon such a strategy, but rather, what actions to take from fully exploiting their advantages of scale, volume, and during the period that protection still exists. Most countries financial strength.
in Latin America and in the world are opening their borders, The alliances observed are usually verbal arrangements for and every day it will become more difficult to convince policy collaboration in different areas, such as supply or marketing, makers to raise or maintain levels of protectionism. When focus or specialization in certain areas of business, technology, governments do agree to protect certain sectors of the econ- and exchange of information. This option, like the national omy, it is usually a temporary measure during an adjustment defense strategy, can be useful as a means of winning some period rather than a permanent policy. time to prepare for competing against any world-class com-If the national defense strategy is to be employed by an pany that penetrates the local market. Moreover, the profits for association of businesses, then it must be recognized that this the companies involved usually increase at least temporarily strategy will provide only a temporary advantage and as such during periods of alliance and collaboration, since these alli-will win the country a little time to develop a true competitive ances most often occur before international competition ap-advantage that will allow it to compete at in local and interna- pears on the scene or because the companies can take advan-tional markets. Unfortunately, we have noted that many Latin tage of their temporary leadership to charge higher prices. American companies opt to fight for the status quo per se This is a valid option within the Latin American context and and not for the purpose of buying time to prepare for trade has been utilized, although in some parts of the world such liberalization. In most cases, these companies fail as soon as a strategy could be considered monopolistic and thus explicitly protectionism inevitably comes to an end. The case of Turri prohibited by law.
S.A. is an interesting example of a Latin American company There are several problems with this strategy. One is that that has known how to recognize the importance of temporary in the majority of alliances there is only a verbal or written protectionism and has taken advantage of this time to prepare agreement for collaboration that is not usually sustainable for the free market economic policies and trade liberalization over the long term. Every day companies may be confronted that its management had predicted. with temptations to break the alliance, whether it be to pursue a new business opportunity independently, to form a new relationship with different partners, or even to sell out at a
Alliances between Local Competitors
premium price to an international company. In any case,alliances can be useful if one recognizes that they are both In recent years, we have observed a significant increase in
temporary and for the most part fragile, since the objectives alliances between local competitors in order to improve the
these companies have in common are usually less important local strategic positioning companies involved. One
interest-than their individual objectives. Only a merger can really ing aspect of this strategic option is that for decades many of
ensure that the effort will be sustainable over time, in which these companies had been fierce rivals in the local market,
the synergies created by the merger are of sufficient mutual and now we see them acting together to defend their market
benefit to compensate for the loss of independence. from external competitive threats. Examples that we have
We have observed many cases in which Latin American studied include the poultry industry in a Central American
companies that we consider to be low performers or strategi-country, where an alliance was developed between local
inevitable failure. Clearly, no alliance or merger by itself is a advantage of every possible resource available in order to substitute for operational effectiveness or sound competitive capitalize upon its many years of influence in the market, strategy. Members of such opportunistic alliances will not be exploiting the fact that it is a local “elephant” and not merely able to compete in an open market unless they undergo drastic an “ant” at the global level.
change in the way they operate and/or in the way they compete. The multinationals interested in Latin American markets In either case, the first step is to review performance and strategy include world giants with much experience in penetrating to evaluate whether an alliance or merger will provide the emerging markets. Their strategies range from direct invest-complementary operating skills or will improve the company’s ment in new “green field” operations to acquisition of local strategic position so that it can compete successfully. companies and distribution chains. Local companies usually It should be clear that what is really being achieved a local have four alternatives in the face of such competition: they alliance strategy is time to prepare for open competition. If can sell their business, become allies, compete successfully, the time is not well used, all that is obtained is temporary or simply do nothing and wait for the inevitable erosion of protection from the market, which basically makes this an- their markets and failure of their business. One might ask other variation of the national defense strategy. Unfortunately, why a world giant, with all its resources, might be interested many Latin American companies do not take advantage of in acquiring or establishing an alliance with a local company. this unique opportunity to prepare for competition by making In fact, local companies may be in an excellent position to the decisions and investments needed to assure their future negotiate alliances or outright sale to international competitors success. Curiously, the temporary advantage provided by an who perceive them as obstacles to local market penetration alliance is often utilized to exploit an oligopolistic position or as interesting opportunities for growth. This is precisely and to continue “milking the company” rather than preparing why it is important for a company to create real competitive it to compete. advantage in its local market. It vastly improves the company’s Whether or not this strategy is sustainable will depend on negotiating position, and, in the worst of cases, enhances the the level of commitment, complementarity, synergy, and how value for sale to foreign investors.
serious the companies are about making the changes required Our research indicates that those companies that have been for a competitive market. Effective management of strategic able to develop a clear and consistent strategy for local market alliances requires that the companies involved know each positioning also have been capable of sustaining their position, other very well, that they are able to identify areas of comple- even against the largest and strongest of international competi-mentarity, determine potential areas of conflict, set up clear tors, without the need to sell out or form an alliance. Local rules, achieve congruency of strategies and goals, communi- customers that have been consuming quality products and cate clearly and frequently, carry out transparent transactions, services from these companies for many years generally con-compete equitably, act flexibly, review their agreement con- tinue to be loyal even when new options appear on the market, stantly, and finally, recognize the moment when the alliance unless the quality/price relation changes drastically.
Compa-should end. nies that have gained a position of local competitive advantage
are usually the ones that fight hardest to maintain their inde-pendence and to control their own destiny. Before selling out
Creation of Local
or allying with multinationals, they are tireless in seeking
Competitive Advantage
other options that allow them to maintain control, such asselling shares to the public, seeking venture capital, or gaining Strategies of national defense and alliances between local
com-access to technology, that allow them to continue being suc-petitors are both temporary responses, although as we have
cessful in their domestic market. said, they can be advantageous because they provide the space
Experience with Latin American companies that have suc-and time to develop a true competitive advantage that will
cessfully made use of the local positioning strategy indicates ensure success. We shall now address this issue directly. How
that some of the most important strategic dimensions are is it that true local competitive advantage is created? This is
image and brand familiarity, knowledge of local consumer an important question not only in the defense of domestic
needs, access and close relationships with the complex net-markets but also because the same advantage that enables a
work of local distribution channels, the maintenance of suit-company to compete locally also may enable it to compete
able levels of technology and innovation, specialization, selec-internationally.
tivity in the recruitment of human resources and programs Genuine competitive advantage must be based on a group
for their continued development, and the appropriate degree of strategic dimensions possessed by the local company that
of vertical integration. are difficult to imitate—especially by a foreign business—and
This Special Issue describes some of the most important that ensure the company’s long-term sustainability. When
examples of the creation of local competitive advantages. competing in its local market against very large multinational
These include the acquisition of new product lines, technology or global companies that possess superior economic, human,
(Zylberstajn, Turner, and Jones, 1995), CECSA (Selva, 1997), markets. Businesses interested in aggressive growth generally Carrier de Mexico (Trostel and Light, 1996) Turri S.A. and find that local possibilities are limited, and this forces them Rheem-Saiar (D’Andrea, Postigo, and Florin, 1994; Paladino to expand operations outside their national boundaries. This and Almaraz, 1994); the importance of professional human was also true in the past, but the decision to expand geographi-resources and a strong and independent board of directors as cally had more to do with vertical or horizontal integration seen in the Virutex-Ilko (Martinez, Baez, and Salinas, 1992) or diversification. We have observed that many family groups family group; and the level of specialization that Endesa and consortiums in Latin America decided to continue growth (Brenes and Martinez, 1993) is working to enhance, not by means of investments in their own country but in activities through diversification, but through direct investment in other other than their own principal business. Experience has shown Latin American countries in the area of its principal expertise. that in most cases this was not the best decision. Specialization The companies in this category have great potential for or concentration of the principal business has been the most being winners in the new world environment, at the regional successful option now that Latin America is facing a business and international levels as well as locally. But to do this, it is setting that is much more open in terms of trade and economic clear that they will have to maintain and strengthen their policy. Given this situation, the large Latin American groups level of innovation and creativity, constantly reinventing their have had to focus their efforts on the activities where they have sources of competitive advantage. Latin America industrial developed real competitive advantages and have consequently sectors face increasing rivalry that will represent an enormous found themselves obliged to expand into other markets as a challenge for these companies. This competition can come in means of maintaining the desired level of growth. The Endesa many forms, including excellence in products and services, case provides an excellent example of a Chilean company with stronger competitors, or even a proliferation of imitators. Each a desire and necessity for growth after earning significant firm will have to determine which are the key elements of financial surpluses, but totally limited by the restricted possi-its success and constantly reinforce these elements, as well as bilities at the local level. As a result, rather than thinking determine new areas that must be developed in order to guaran- about diversification into completely unknown fields, Endesa tee the sustainability of comparative advantage in the long term. decide its best option was to stay within its area of expertise
and invest in Argentina.
A third reason for regional or global expansion concerns
Going International:
the real or apparent limitations that local businesses perceive
Regional or Global
in regard to new competition in their own market. On many occasions the companies seek out new markets, since most Latin American companies have recognized that creating localoften the new competition means a partial loss of their market competitive advantage in domestic markets is often not
share and consequent underutilization of production capacity, enough to ensure sustained growth and profitability;
some-which is offset through exports to other markets. In some times it becomes necessary to expand activities into the
re-cases, such as that of Rheem-Saiar, the company not only had gional or international arena.
to face an important change in the local setting caused by There are several reasons for this. First, new markets must
more competition, but it also had excess capacity and a great be sought to achieve economies of scale for competing with
business opportunity to penetrate new markets in developed international companies entering the region. These companies
countries using new and different strategies, with enormous generally are much larger and more efficient, since they are
potential for growth. competing at the regional or global level. For many decades
In still other cases, regional or global expansion has been Latin America’s traditional protectionism permitted only the
the result of a changing mentality on the part of the Latin development of relatively small companies that could compete
American businessperson who has been moving away from a successfully in local markets where there was no external
narrow, local vision toward a regional or global one. These competition of any kind. Today it is much more difficult for
businesspeople have discovered that the characteristics of spe-smaller-scale businesses to compete, even when they enjoy a
cific market segments in other parts of the world are often local competitive advantage. The need to confront companies
similar to these same segments in their domestic market, that are much larger and much more efficient has motivated
allowing them to develop their company under the same organizations to achieve higher levels of efficiency, and in
regional or even global strategic concept. This penetration of many cases this is obtained through geographic expansion,
regional or global markets turned out well when the company either regionally or globally. This strategy not only makes it
already had been successful in its own market. Bancrecen is possible for the companies to compete in new markets but
a good example, since its strategy in Costa Rica—which the also to improve their competitive position in the local market.
company would like to repeat in the rest of Central America—is A good example of the strategy, included in this special issue,
exactly the same as the one employed by its parent company is the case of Virutex Ilko, a Chilean company that decides
in Mexico. to export to the United States and later to Europe.
possi-bilities for long-term positioning, growth. and profitability multinationals such as Unilever, Kraft, and Cargill. Its original goal was marketing to the Andean Pact and then the rest of in Latin American markets than in the developed countries.
Latin America, but today its products can be found all over Regional businesses traditionally have penetrated international
the world. Because of its growing financial needs, the company markets under strategies of low cost (Woodside, 1997), but
also decided to make use of international capital markets, and on many occasions Latin American markets offer opportunities
today is quoted on the New York Stock Exchange. to change their positioning to one of greater differentiation
In conclusion, there are at least four strategic options for and higher profitability. Examples are Virutex Ilko and an
Latin American companies facing international competition, earlier case not included in this volume, Hush Puppies Chile
the national defense strategy; alliances between local competi-(Morrison and Bowey, 1993).
tors; the creation of local competitive advantage; and going The strategy of penetrating international markets has been
international. It should be clear, however, that the only strate-repeated successfully by Latin American companies. One
ex-gies for long-term sustainability are those that pursue true ample is the case of Consorcio Ferrex (Goiri, Edigo, and
competitive advantage rather than temporary protection. Ex-Martı´nez, 1993), which involved a group of competing
compa-perience documented in these case studies has shown that nies who joined together in order to export to developed
this competitive advantage will be of assistance in international countries. The consortium integrated volume, variety,
trans-as well trans-as in local markets. portation, design, marketing, etc. under one single brand but
only for export purposes. Another example is the use of
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