16 Apr 2001  Research & Ideas

Making the Most of Government Upheaval

Why do some firms in emerging economies quickly rise above the rest? What are their competitive secrets? New research by HBS professor Rogelio Oliva and his colleague Fernando F. Suarez suggests a few answers.

 

Beginning with Chile more than twenty years ago, Latin America has experienced a wrenching yet exciting transformation of its predominantly inward-looking, state-driven economies to a robust acceptance and practice of open-market principles. Structural reforms in trade, finance, labor, taxes, and privatization have created unprecedented opportunities for firms of all sizes and varieties to compete in larger markets than ever before.

In the process, a handful of global organizations have risen to replace formerly state-owned enterprises, while scores of previously "protected" firms have transformed themselves into highly competitive organizations.

Although a considerable body of research has traced the macroeconomic reforms of these emerging economies, little post-reform evaluation, other than isolated case studies, had occurred at the firm level before HBS assistant professor Rogelio Oliva and Fernando F. Suarez began to study the effects of these changes three years ago when both were on the faculty of Chile's Universidad Adolfo Ibáñez. Recently published as an HBS working paper titled "The Transformation of Firms in Post-Reform Emerging Economies," their preliminary findings suggest that the profound economic metamorphoses taking place in Latin America's emerging economies have imposed dramatic changes on the competitive environment, compelling firms to develop new strategies and capabilities in order to compete. Moreover, the authors contend, the transformational process hypothesized in their study may also be applicable to companies in newly emerging economies outside Latin America, such as Eastern Europe, northern Africa, China, and India.

Setting out on their research, Oliva and Suarez were both intrigued by the fact that while many Latin American firms simply folded under the pressure of intensified competition, others—such as Mexico's Hylsamex and Argentina's Siderca, both major manufacturers of steel—emerged to become world-class players. They wanted to know what these companies had done to transform themselves so successfully.

Selecting a group of fourteen firms of various sizes from three industries (energy, steel, and food/beverages) in four countries (Argentina, Brazil, Chile, and Mexico), the two scholars set about to find answers through field research. Speaking to senior executives, Oliva and Suarez discovered that all the organizations they studied responded to their post-reform competitive environments in roughly four stages:

  • Stage I: Turnaround and Catch-up. Recognizing that their efficiency and quality levels were far below those of world-class competitors, the firms initiated action plans to measure the gap and catch up. Often such change involved significant modifications in the structure, size, scope, and culture of the organization.
  • Stage II: Expansion. Realizing that growth was imperative for survival against larger rivals, the companies expanded their operations significantly, usually joining with related businesses in the local market or even in other countries.
  • Stage III: Acquisition of New Capabilities. Becoming increasingly sophisticated as they competed with larger foreign rivals, the firms developed new capabilities in areas such as customer service, technological innovation, and brand management.
  • Stage IV: Quest for Industry Leadership. Having completed the previous stages, the companies concentrated on becoming dominant in a particular industry. As a result, some were able to compete with the best of their global competitors; others became top-class niche players in the region.

  • According to Oliva and Suarez, YPF, Argentina's formerly state-owned oil company, is one example of a company's transformation following economic reform. Unlike Chile, which modified its economic policies gradually under the Pinochet regime, Argentina imposed massive reforms in privatization, capital markets, trade tariffs, and taxation virtually overnight in 1991, sending shock waves throughout its economy. For YPF, at the time heavily diversified in cinemas, airlines, hotels, and restaurants in addition to energy, the first order of business was to contain costs, including a reduction in its workforce from 50,000 to 5,500 employees and the sale of all of its non-oil-related assets. By the end of this eighteen-month phase, two-thirds of the company was sold.

    In Stage II, YPF took advantage of expansion opportunities by entering the Chilean market through its downstream operations and by acquiring a company in the U.S. market, thereby positioning itself as a global player in oil. By the time it reached Stage III, YPF had developed several innovative capabilities, including "dual ladder" promotion systems to nurture technological talent within the organization. By 1999, YPF had turned itself into a competitive company in the world market—a hot property that was recently bought by Repsol, the largest energy consortium in Spain.

    Once they arrive at the final stage of their transformation—a level achieved by only a few Latin American companies so far—firms "increasingly act and look like world leaders in their respective industries," sometimes even taking "bold steps that surprise their 'first world' counterparts," Oliva and Suarez write in their working paper. For example, they point out, when Cemex, the giant Mexican cement maker, bought the largest cement company in Spain, it was evident that a once nationally focused enterprise was ready to go head-to-head with leading corporations in Europe and the rest of the developed world.

    Because they developed their initial analysis from a small sample, Oliva and Suarez, who is now at the London Business School, plan to survey 250 Latin American firms in various industries to test the validity of their findings. "Above all," they say, "we want to confirm the existence of the various stages of competitive transformation. Future research will also help us define the timing of each stage more precisely as we try to determine the extent of the challenges that firms in these post-reform emerging economies face."

    Reprinted with permission from Working Knowledge: A Report on Research at Harvard Business School, Vol. IV, No. 3.