Business Case Studies, Executive Interviews, Kai-Alexander Schlevogt on Emerging Markets

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Executive Interviews: Interview with Kai-Alexander Schlevogt on Emerging Markets
February 2008 - By Dr. Nagendra V Chowdary

Prof. Kai-Alexander Schlevogt
Professor of international strategy and leadership at the National University of Singapore (NUS) Business School. He serves as Program Director of the Nestle Global Leadership Program, delivered in association with London Business School.

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    Legal recourse, however, often is not the most effective means for combating IPR violations, since even perfect laws are difficult to enforce systematically in a country as large and complex as China. Companies who suffer from such crimes have to convince both customers to buy the original product and corporate partners to adhere to standards of good conduct. To start with, the original needs to provide consumers with better value for money than illegally copied goods. In one sense, companies unwittingly helped promote piracy. Whereas in the past, brands stood for excellent product quality, nowadays, they are often just a label for shoddy products made by contractmanufacturers, with the only value being social status or fashion appeal. Consumers who understand the erosion of the substance behind brands regard pirated goods as perfect substitutes for the real thing. To counter this harmful trend, original equipment manufacturers (OEM) can make software updates available only to users of genuine versions. Music labels should put in place elaborate systems to ensure that the quality of the recording medium is superior to pirated goods.

    Many multinational companies may have to transform their corporate culture to enable such radical rethinking. As regards pricing, sacred cows must be slaughtered. In many cases, at least at the initial stage, intellectual property should be sold in China at prices only slightly higher than in the black market. Then, consumers have no real incentive to accept the inconveniences associated with pirated products, such as missing out on the last few dramatic minutes of a movie because of scratches on the surface of a DVD. In particular, executives may need to get rid of what I call “margin obsession”. High volumes resulting from low prices will help generate significant profits even when margins are low. This will unleash a virtuous circle. The cash can be used to fund Research and Development, which will help the firm keep an edge over competitors. In contrast, premiums prices may lead to a vicious circle of low demand, dwindling funding and an erosion of competitive advantage. Companies that adopt the revolutionary pricing scheme only need to protect mature markets from parallel Chinese imports. For example, Singapore sells original music CDs with licensed contents from Sony, which are made for the Chinese market. These imports from China are sold for half of the price of the CDs with identical contents targeted at maturemarkets.

    As an incentive for Chinese contract manufacturers, OEMs should hold out the prospects of granting them preferred supplier status if they perform well. This way, one-off and arm’s length transactions can be transformed into long-term trustbased relations. The latter are a form of “repeated game” with reputational effects, in which players have less incentive to fool others than in games that are only played once. To discipline Chinese suppliers, OEMs also need to link up with alternative service providers elsewhere. For example, consumer goods companies could start working with an EMS company based in the Philippines if the latter has a strong track record of IPR protection. Many Chinese employees dream of setting up their own firmandmight steal trade secrets to be used after they have jumped ship. In contrast, personnel in the Philippines tends to prefer working for large companies indefinitely. Faced with credible foreign competitors, Chinese contract manufacturers might feel a sense of urgency to improve their conduct.

    Here is another example of how companies may counter intellectual theft: A foreign publisher works together with Chinese counterparts who have a similar interest in developing awareness for copyright issues. Besides, products can be divided into modules that are developed in different countries. Even if Chinese companies were to copy one module, they would still lack the other parts needed for the final product.

  • In China, what do you think is more important: First Mover Advantage or Second Mover Advantage?

    Most executives do not analyze the facts to determine whether they should invest in China. Few of those who feel compelled to go ahead think carefully about the optimal timing of their moves. Following the herd, they succumb to what I call the “early bird syndrome”, assuming that investing in China earlier is always better than later.

    Instead of relying solely on instinct and mimicry to make decisions, I recommend managers to go through the following non-exhaustive checklist to determine whether they should act first or wait and see. The result may be a differentiated approach: Based on the analysis, executivesmay conclude that in some cases they have to move first to dominate certain product categories, locations, customer segments and channels. In other cases, they may first study the performance of competitors before making a decision as to whether to follow suit. The more of the following external and internal factors, many of which are interrelated, are present in their situation, the more likely it is that they can benefit from first mover advantages. Those make it possible to create industries or improve industry structures, and build strong positions in a cost-efficient manner that are difficult to conquer or replicate by others. As I will show, careful factbased analysis is a must, because first mover advantages may be an illusion in the first place or turn into disadvantages at a later stage:

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