Elsevier

Long Range Planning

Volume 39, Issue 2, April 2006, Pages 177-197
Long Range Planning

Market Penetration and Acquisition Strategies for Emerging Economies

https://doi.org/10.1016/j.lrp.2006.04.004Get rights and content

Abstract

Multinational enterprises (MNEs) are expanding their global reach, carrying their products and brands to new and diverse markets in emerging economies. As they tailor their strategies to the local context, they have to create product and brand portfolios that match their competences with local needs. A multi-tier strategy with local and/or global brands may provide MNEs with the widest reach into the market and the potential for market leadership. However, it has to be supported with an appropriate combination of global and local resources. Foreign entrants therefore have to develop operational capabilities for the specific context, which requires complementary resources that are typically controlled by local firms. As institutional obstacles and weaknesses of local firms often inhibit the direct acquisitions, foreign investors may pursue unconventional strategies to acquire local resources.

We outline the strategies for penetrating local markets through multi-tier branding and the acquisition of local firms, and offer new typologies that describe staged, multiple, indirect, or brownfield acquisitions. We illustrate them by analysing the entry and growth of Carlsberg Breweries in four very different emerging economies: Poland, Lithuania, Vietnam and China.

Introduction

Globalisation brings multinational enterprises (MNEs), their products and their brands into ever more remote corners of the world. The large number of potential customers in emerging economies raises expectations of unprecedented demand for consumer goods, if only the right products could be delivered in the right places.1 Yet MNEs encounter business environments in emerging economies different from those with which they are familiar as well as varying greatly from each other.

The main attraction of emerging economies is their high economic growth and the corresponding expectation of rapidly increasing demand for consumer goods. Thus, as C.K. Prahalad argues, there is money to be made “at the bottom of the pyramid”.2 The sheer number of people, even if they are on low incomes, makes the less developed parts of the world attractive to business. However these markets pose unique challenges because of their less sophisticated institutional environment and the weak resources of local firms.3 Businesses may have to develop different strategies and new business models to serve the few wealthy customers in these areas as well as the mass market.4

The appropriate positioning of the product portfolio is crucial to success in emerging economies. As Dawar and Chattopadhay outline, emerging economies comprise very diverse customers that may have to be targeted with different products, brands and even business models.5 Consequently, potential entrants face trade-offs between developing a global brand for the premium segment, where substantive margins can be earned, and developing products with large-scale and cost-efficient production for the mass markets and earning profits through volume. International marketing scholars debate the trade-offs of global standardisation and local adaptation in emerging economies.6 In addition to global or local brand strategies, many MNEs combine them in a multi-tier strategy to reach both the mass market and the premium segment. We argue that this strategy may be particularly suitable for emerging economies where the large distance between the premium and mass markets is typically big. However, the appropriate strategy depends on the nature of the investor's resources.

Market penetration starts with the entry strategy, which has to provide access to local resources, such as distribution networks as well as local businesses and authorities. In emerging economies, investors have to think beyond the conventional entry modes of greenfield, acquisition and joint venture (JV). We introduce and illustrate a more differentiated typology of acquisition strategies that provides better support for managerial decisions. In particular, we distinguish between entry modes suitable for foothold strategies, and aggressive ones aimed at market leadership. The creative designing of entry modes, rather than choosing between textbook models, allows MNEs to achieve their objectives.

We develop suggestions on how to manage entry in emerging economies by drawing from two research projects on FDI in emerging economies, which are based on local research and interviews at corporate headquarters (see Appendix). We illustrate the diversity of entry and growth strategies to different local contexts by comparing the strategies of one multinational enterprise, Carlsberg Breweries, over the past decade in four emerging economies. The longitudinal and comparative case provides a powerful illustration of the issues and the dynamics of strategy evolution that may be overlooked in conventional, large dataset analysis.

The brewing industry provides an interesting case because it has gone through a rapid concentration over the past decade. Even in concentrated markets, local and international brands continue to coexist. The parallel development of multiple brands and the structural changes in the industry reflect trends seen in many other food and beverage industries.

We focus on four countries that reflect the diversity of Carlsberg's experiences. Carlsberg entered Poland with a partial acquisition in 1996, and has built a strong position using staged, multiple and indirect acquisitions. In Lithuania, Carlsberg took over a local brewery in 1999 and acquired further local brands in a global merger in 2001, thus developing a dominant market position. In Vietnam, Carlsberg entered in 1993 with two JVs that serve both the mass market and the local premium market. After long perseverance both generate handsome profits. In China, Carlsberg was a minor player in the 1990s, but in 2003 it initiated an aggressive strategy of acquisitions in the west of the country, aiming to capitalise on its emerging economies experience.

We develop our arguments as follows. In the next section, we introduce the emerging economy context. Then we outline how consumer goods MNEs may position themselves in emerging economies. On this basis, we discuss how MNEs may use acquisitions and joint JVs to access the local resources to build their position. These ideas are then illustrated by four cases of emerging economy entries by Carlsberg Breweries. The final section offers some conclusions.

The opportunities offered by the sheer size of the markets in emerging economies as well as their impressive growth has accelerated attempts by MNEs to enter them. Emerging economies offer large markets for consumer goods with a high growth potential. This applies not only to China and India, but also for example to Poland, which is a medium-sized European market with a population of 38m. Poland went through a deep recession in the early 1990s but the rest of the decade saw spectacular growth. In contrast, Vietnam has more than 80m people and, in terms of market size, is larger than any European country except Russia. Its per capita income more than quadrupled over the 1990s. Large, fast-growing markets and low factor costs make such countries attractive for international businesses.

Despite their attractiveness, emerging economies typically lag behind in terms of economic development and the intricacy of the institutional environment. We define emerging economies as economies with high growth or growth potential, but without the sophistication of the institutional framework seen in western Europe and North America. Foreign entrants face additional obstacles and risks:

  • Emerging economies are highly volatile because of frequent changes in institutions, industry structure and the macro-economy. Economic growth may be high, but crises are frequent, as the Asian crisis of 1997 demonstrated. The volatility provides competitive advantage to firms with the flexibility to react to changing circumstances and to grab new business opportunities.7

  • The institutional frameworks may require different ways of interacting with business partners and authorities. “Institutional voids” often inhibit the efficiency of markets and increase business risks.8 Consequently, firms may internalise markets for intermediate goods and services, such as capital and human capital, and they may rely to a larger extent on personal relationships to interact with others.9

  • Many of the capabilities needed to compete in emerging economies are context-specific. Local firms and individuals develop their capabilities to suit the specific context, which may create major barriers to entry.

  • Many industries are highly fragmented with many small firms competing for a share of the market. With the entry of foreign investors, the market structure may rapidly change, creating uncertainty.

These obstacles have not deterred MNEs, which instead have adapted their strategies. In the next sections, we outline how this can be done, focusing in particular on branding and the acquisition of local resources. Decision makers first need to clarify their long-term objectives, namely their aspired market position. On this basis, they can then analyse which entry mode would be most suitable to achieve their objectives. In this respect, we first discuss long-term marketing strategies before turning to initial entry mode strategies.

Emerging economies pose different challenges for marketing than industrialised countries. Typically, incomes are low, labour is relatively cheap and the customer groups are highly variable. However, Dawar and Chattopadhay show that even under these conditions, foreign investors can profitably serve these markets by adapting their strategies to the local context. For instance, low-income groups can be served by the cost-efficient production of mass products, emphasising economies of scale and earning profits through high sales volumes. Low incomes constrain demand, but the corresponding low wages also create opportunities for people-intensive approaches to marketing. For instance, sales assistants may hand out samples or promotion materials, or support service in bars and restaurants. Distribution staff may deliver smaller but more frequent shipments to sales outlets.

The variability of customer groups in terms of income and regions creates a highly segmented market, which itself produces a challenge for MNEs aiming for large market shares. Principally, foreign entrants could choose between three types of strategy:

  • 1.

    Global branding – global brand with little or no adaptation, positioned as premium brand;

  • 2.

    Local branding – portfolio of local brands, positioned to serve mass markets; and

  • 3.

    Multi-tier branding – portfolio of global local and brands, positioned to serve different segments of the market.

Exhibit 1 illustrates in which contexts these three strategies may be appropriate. These strategic alternatives also exist in industrialised economies, but in emerging economies the segmentation of markets makes the choice of strategy particularly crucial. In emerging economies, one can expect large margin differences between global brands and local mainstream brands. On the one hand, the mass market is highly price-sensitive and local competitors may offer standard products at low prices. On the other hand, the premium segment is the prerogative of the middle and upper classes, which are less price sensitive and very status conscious. The suitability of a strategy, and the relative weight given to global and local brands in the product portfolio, varies with the structure of the industry and the firm's own resources and capabilities.

A global brand strategy allows focus on the premium segment. This segment is often small, but attractive because of the substantial purchasing power of the middle classes in emerging economies, even where average incomes are low. Volumes are typically small, yet margins may be large. The advantages of a global strategy are well recognised. For instance, Quelch points to added value for consumers because of a consistent worldwide brand image, lower costs from economies of scale, cross-border learning and attraction and recruitment of ambitious employees.10

The premium segment is particularly attractive in cultures where status and prestige are highly valued, as in many Asian countries. The prestige of a brand is therefore a major factor in the consumers' perceived value of a product.11 This “conspicuous consumption” implies that demand for the most expensive brand may exceed that for a less pricey premium brand.

A global brand strategy requires, first and foremost, a recognised global brand, along with the ability to communicate the brand's values and to deliver quality even under adverse conditions.12 It does not necessarily require direct investment. Premium brands may be imported and distributed through local agents, especially if the country of origin forms part of the brand's image and if transportation costs are low.

A local brand strategy allows MNEs to serve markets that are distinct from global markets. In particular, a portfolio of local brands may not generate huge sales margins, but it can build market share and lower unit costs through economies of scale and volume sales. Selling one thousand units and earning one cent for each, is as good as selling 10 units and earning one dollar each.

Consumer goods, notably durable goods such as washing machines or motorcycles, may be adapted to the needs and purchasing power of emerging economies by reducing the variety of models and by stripping out non-essential features. At the same time, product features may be adjusted to the needs of the local markets, such as improving its robustness to cope with an unreliable electricity supply or the lack of a local service network. Scholars such as Dawar and Chattopadhay point out that such product adjustment may require development costs, but it may allow the product to reach new consumers and increase economies of scale and thereby reduce production costs. Others, including London and Hart, and Prahalad go one step further and advocate the development of new products and business models in a bottom-up fashion through direct interaction with local communities, and by giving local entrepreneurs leverage to adopt products locally.13

A portfolio of local products and brands may be particularly suitable where average incomes are low or where markets are regionally segmented as a result of high transportation costs (relative to value added), attachment to local brands, the limited reach of media and people-intensive distribution networks (as in Vietnam).

Success in the mass market requires operational capabilities to support a low-cost strategy. In this segment, foreign entrants would compete with local firms that produce at low costs, are familiar with the market, are well networked and are used to adjusting to a volatile economy and frequent changes in regulation. Entrants therefore need competences and business practices in managing production and marketing under emerging economy conditions, such as strategic flexibility and networking capabilities.14 Such operational knowledge may be transferable between emerging economies, allowing MNEs to share experience across subsidiaries to develop unique capabilities for supporting local brand strategies. Firms with strong operational capabilities but without internationally-known brands may opt for this type of strategy (Exhibit 2).

Foreign entrants can combine global and local brands to achieve synergies. This is especially appropriate in emerging economies where markets that are highly segmented.15 “Multi-tier” strategies join global and local brands so that local brands cater to the medium or low-price segments of the market, while global brands aim at the upper end.

Synergies arise especially in distribution channels through economies of scope in local production and logistics, and may strengthen bargaining power vis-à-vis suppliers and retailers. Parallel coverage of multiple market segments may provide some protection against market fluctuations, and the value of a local brand may be enhanced through its association with the global brand. For instance, Quelch points out that even Coca-Cola has launched a wide portfolio of local brands on the back of the distribution channels of its global brand. At the same time, separate branding may protect the global brand from adverse reputation effects, such as low quality of local production.

A crucial advantage of a multi-tier strategy in an emerging economy context is the ability to introduce and promote the global brand if and when the market is ready. With economic development, demand for premium brands is likely to pick up. The global brand may be pushed through the existing channels of the local brands, which provides a flexible set-up to react to market trends. Early movers may then earn high returns on their investment in a premium brand.

However, multi-tier strategies carry additional costs and risks. Different market segments may require different competences and organisational cultures. This, in turn, creates operational challenges for firms aiming to integrate business units with different imperatives, such as margin versus volume, and innovation versus low cost. For example, the management of branded pharmaceuticals may require different competences than those required for generic pharmaceuticals. Moreover, an association with a weak local distribution system could weaken a global brand. This would be of particular concern for consumer durables, such as cars or televisions, for which premium customers expect a higher level of associated services. For such products, sharing retail outlets and after-sales service units for different brands may be less advisable. This is, however, of less concern for fast-moving consumer goods, such as beer, because retail outlets and pubs usually prefer to offer a range of different brands.

A multi-tier strategy has to be supported by an appropriate combination of resources. As illustrated in Exhibit 2, firms with global brands and the capability to support this brand in remote corners of the world would choose a global strategy (quadrant I). Firms with expertise in operating and upgrading production and marketing in emerging economies but without a global brand can expand by building local brands (quadrant II). A multi-tier strategy may be most attractive in terms of market reach, yet it requires the MNE to possess crucial resources for all segments (quadrant III). They need a global brand and the capability to market and deliver this brand with global quality standards, as well as operational capabilities for competing with local competitors familiar with the context and producing at low costs. On the other hand, if a firm has neither a global brand nor operational capabilities that are transferable to emerging economies (quadrant IV), the company may have little to gain by investing in emerging economies. A foreign entry would require it to develop a brand and capabilities “along the way”, which is a highly risky strategy.

How can MNEs build capabilities for operating in emerging economies, and compete with local brands? A crucial element in implementing an emerging economy strategy is the acquisition of resources that are controlled by local firms. Yet takeovers of local firms are inhibited by factors such as regulatory constraints and the scarcity of potential acquisitions.

Thus, decision makers have to think creatively how to design their entry strategy. They are not limited to the traditional set of entry modes - acquisition, greenfield or joint venture (JV) - as much of the academic literature implicitly assumes. Many obstacles may best be overcome by customising a mode of entry to the local context, rather than opting for a second-best mode. Entrants develop idiosyncratic forms of acquisition, such as staged, multiple, indirect and brownfield acquisitions, as well as JVs to overcome the aforementioned obstacles in emerging economies (Exhibit 3). These allow for new variations in the key dimensions discussed in the literature, namely control and access to resources.16

Entrants aiming to penetrate a market would look for acquisition targets with access to or control of key points in the distribution channel and knowledge of the political and institutional framework. Firms pursuing global brand strategies would, in particular, seek access to distribution channels that allow them to control the quality of their products. In contrast, those pursuing a local brand or multi-tier strategies require a fuller range of local assets, including brand names and knowledge of local consumer behaviour. Moreover, in some contexts, co-operation with a local firm may help build political goodwill. The technology of local firms may not in itself attract market-seeking investors, but the ability of the workforce to learn may be important. The employees of the relatively advanced local firms may be best qualified to benefit from training and to adopt new technologies and business practices. Yet this broad range of resources may rarely be available in a single firm, making suitable targets scarce.

Even if a suitable target can be identified, an acquisition may be inhibited by obstacles specific to emerging economies. The resource endowments of local firms are often poor, and their technological upgrading and organisational integration may require considerable investment. To overcome these obstacles, foreign investors can choose more or less ‘aggressive’ entry strategies (See Exhibit 4).

Some entry modes serve primarily to establish a foothold in a market. These include partial acquisitions and JVs, which create options for learning and for gradual expansion without a major upfront resource commitment.17 In volatile environments, the flexibility to react to positive changes in a timely manner may be an important competitive advantage. A low level of involvement provides a platform from which to expand if the business develops favourably, while at the same time allowing the flexibility not to commit further resources if prospects turn out to be less promising.18 However, entrants gain only limited control and risk being left behind by more aggressive competitors committing more resources.

Traditionally many MNEs establish a new operation jointly owned with a local firm. This JV provides a foothold, especially where legal constraints inhibit acquisitions, and avoids having to take responsibility for an existing local firm with major restructuring challenges. In a JV, only selected resources are transferred to the new organisation, leaving the core businesses of both partners separate. However, the ownership arrangement is inherently unstable and potential conflicts between the parent companies have to be managed carefully.

Marketing and growth strategies are common areas of conflict between parents of a JV. For instance they may disagree on the relative priority of local and global brands in the marketing budget. Serious conflicts often arise when a foreign investor wishes to expand and invest in building the global brand. The local partner may be unable or unwilling to contribute fresh resources for an aggressive growth strategy, but at the same time object to capital increases that would dilute its equity share and influence. Thus, JVs require less commitment, but may lock the investor into a partnership that later limits growth options. Forward-looking JV founders would anticipate such conflicts when drafting the JV contract, for instance by stipulating conditions under which one partner may take over the JV.

Like JVs, “staged acquisitions” of an existing firm require limited initial investment. At the outset, staged acquisitions are partial acquisitions in which the foreign investor has the option to acquire full control later. The initial role of the foreign investor varies considerably depending on the contract. In the case of privatisation, the investor often gains managerial control, but is subject to formal and informal constraints on radical restructuring. The investor may thus obtain access to local distribution channels but only limited control over the positioning of local brands. The increase of the foreign investor's equity stake may be preplanned at the outset or be initiated in response to changes in the environment, particularly changes in FDI regulation.

Partial acquisitions are potentially subject to conflicts that require compromises. In contrast to JVs, partial acquisitions normally do not draft a contract with clearly articulated common objectives, making conflicts more likely. On the other hand, the buy-out of the remaining shareholders may be easier, especially if they do not have a strategic interest in the firm.

Why do investors in emerging economies accept to share control? Often, the decision is a matter of limited opportunities, as the owner may be unwilling to sell outright. This is common both for privatisation agencies and family-owned businesses, the most frequent ‘sellers’ of enterprises in emerging markets. However, the continued involvement of the previous owner may also be advantageous for the acquirer.19 If the state or an influential local conglomerate shares the risks as well as the profits of the business, they may also help alleviate potential adverse interference by bureaucrats in less predictable institutional environments. Thus, shared ownership may help align the interests of the local community with the prosperity of the business.

Multiple and brownfield acquisitions allow aggressive market entries but they also require a higher commitment of initial resources. “Multiple acquisitions” is probably the most aggressive entry strategy. Where local firms are small, a single acquisition may not be enough to attain a strong market position. Multiple acquisitions allow foreign investors to build a strong nationwide market position in fragmented markets, and to create a portfolio of local brands. Consequently, an acquisition is often only a small building block in the envisaged new operation in an emerging economy.

Another aggressive mode would combine elements of acquisition and greenfield in a “brownfield acquisition”,20 where the post-acquisition investment exceeds the investment in the original acquisition. The restructuring needs of some firms in emerging markets are so extensive that foreign investors essentially replace all resources apart from a few sought-after assets, such as local brand names, licences or distribution channels. It may appear counterintuitive that foreign investors are willing to shoulder the burden of transforming an uncompetitive enterprise, but they would do so if the perceived value of the key assets exceeds the restructuring costs. The assets motivating brownfield acquisitions are often brands of high local esteem. By combining aspects of traditional acquisitions and greenfield operations, brownfield investments provide an aggressive route into a market.

Conventional acquisitions, taking over a single firm to building the local operation on it, are an intermediate form in terms of aggressiveness of the market entry (Exhibit 4). The same applies normally to “indirect acquisitions” that occur as a byproduct of an acquisition in a different country. An indirect acquisition may be a shortcut to gaining market share quickly, especially if the acquired firm has strong global and local brands.

These entry modes provide innovative means to implement entry strategies, especially multi-tier strategies that depend on the combination of resources from the foreign investor and local partners. Entry modes set the stage for foreign investors' market position, but also shape possibilities for later fine-tuning. Foothold strategies, such as staged acquisitions and joint ventures, provide flexibility by creating growth options. Aggressive strategies using full and multiple acquisitions provide flexibility through control and the ability to change the local operation.

The brewing industry provides interesting examples how MNEs combine different brands, and adapt their entry modes to local contexts. Beer is a traditional, culturally-embedded product, especially in Europe. Like other food products, it is influenced by local cultures and traditions, and the regional origin of the product plays an important role in the buyer perception. Thus, customer loyalty to local tastes and brands creates barriers to entry for international brands. Moreover, beer's short shelf life, high transport costs, as well as tariffs and national quality standards tended to limit the internationalisation of the industry.21 These characteristics of the industry suggest that, traditionally, local brands would dominate (see Exhibit 1).

Even so, the industry has gone through a rapid concentration and internationalisation in recent years. Local brands still dominate in most markets worldwide, yet they are often owned and supported by multinational brewers - a “hidden globalisation”.22 A few global players have emerged, expanding by acquisitions and global mergers such as Ambev-Interbrew and SAB-Miller. They combine local, global and multi-tier strategies.

A local brand strategy has been pursued most famously by South African Breweries (SAB), which expanded in the 1990s from its South African base to emerging economies in Africa, Asia and Eastern Europe. Typically, it acquired local breweries and reorganised their production and marketing to make them profitable. SAB developed local brands to fit the markets, while at the same time increasing productivity by replicating its low-cost brewing techniques and rigorously applying standardised management procedures. However, global market leaders, such as Heineken and Interbrew mostly pursue multi-tier strategies and Carlsberg joined this trend.

Carlsberg participated in the global industry concentration and grew its beer business internationally while divesting its non-brewing activities. Until the 1990s, it pursued related diversification in its home market, and internationalised primarily by focusing on the two global brands, Carlsberg and Tuborg, while treating local brands as a side activity (see Exhibit 2). In many emerging economies, the Carlsberg brand was brewed in JVs or under licence by an independent firm, while elsewhere it was imported.

However, over the past decade the corporate strategy has shifted from related diversification in the home market to “globalfocusing”.23 Carlsberg developed its core capabilities in brewing and marketing of beer to be transferable to both mature and emerging economies, while exiting secondary activities that build on different key competences. Thus, brewing activities outside Denmark grew from 38 per cent to 74 per cent of turnover over the 1990s. By the turn of the millennium, Carlsberg had become one of the top five brewers worldwide, generating turnover chiefly outside its home base of Denmark. In 2004, less than 5 per cent of beer brewed by Carlsberg was sold in Denmark. Eastern Europe contributed 46 per cent of beer sales by volume and 23 per cent of revenues, while Asia contributed 9 per cent of volume and 4 per cent of revenues. (The different ratios between volume and revenue indicate the price differences between West European markets and emerging economies.)

A milestone in the strategic repositioning of Carlsberg was the merger with the brewing operations of Norwegian conglomerate Orkla in 2000. Orkla held a 50 per cent stake in Baltic Beverage Holdings (BBH), which had developed specific competences to acquire, restructure and reposition local brands in countries of the former Soviet Union. It thus achieved strong market positions, including a 33 per cent market share in Russia. The merger provided Carlsberg with wider human and financial resources to support a fully-developed multi-tier strategy, combining a global brand with local brands (See Exhibit 2). Therefore, local brands moved from being a side activity to a central part of Carlsberg's business strategy.

Emerging economies in Europe and Asia have played a pivotal role in Carlsberg's ambition to advance from a European player to a global leader. The company entered many countries as an early, but not first, mover. Carlsberg was therefore often in the role of a challenger rather than an incumbent. Central and Eastern Europe provided a natural stepping stone, given its proximity to Carlsberg's home in Denmark. Major competitors entered the region, especially Poland, creating pressures to follow. Smaller economies, such as Lithuania, provided opportunities to build emerging market experience in relative cultural proximity. In Asia, Carlsberg has been investing since the early 1990s. The JVs in Vietnam were fairly successful, while those in China were insufficient to gain a strong market position. A “Go West” strategy was launched for China in 2003. We explore the adaptation of strategies to the diverse market structure and the institutional environment in four emerging economies (Exhibit 5).

Carlsberg positioned the Carlsberg brand as a “locally-brewed international premium brand” which is complemented by national premium brands: Okocim in Poland, Svyturys in Lithuania and Halida in Vietnam. Regional and niche market brands complete the product portfolios (see Exhibit 6). The marketing strategy for the global premium Carlsberg brand uses global TV commercials that are aimed at emerging economies and advertising at major international sport events. For example, sponsorship of Euro 2004 allowed Carlsberg to reach pubs in Vietnam, where European football is very popular. The price differences between market segments are large, as local brands are substantially cheaper than in western Europe, while prices for premium brands vary less between countries. Top brands therefore sell at a substantial premium. The Carlsberg brand is priced with a premium over mainstream brands of about 10 per cent in Germany, 25 per cent in Poland, and a multiple of that in China. Carlsberg combined many types of acquisition to build its market positions, moving from foothold entries to more aggressive strategies.

The Polish brewing industry went through a rapid concentration process during the 1990s. In less than 15 years, a highly fragmented industry became dominated by three major players controlling more than 80 per cent of the market in 2004, with competitive dynamics increasingly resembling those seen in western Europe (see Exhibit 7).

Carlsberg entered later than its key competitors, and combined multiple entry modes to build its multi-tier position. It established a foothold in 1996 by taking a 31.6 per cent minority stake in one of Poland's oldest breweries, Okocim (see Exhibit 8). This brewery had been privatised in 1992, and Carlsberg acquired most of its shares from German brewer Brau und Brunnen, while local owners, which included many employees, were reluctant to sell. Okocim had been a leading national brewery with a market share of 10.2 per cent in 1990, yet its market share had slipped to 8.3 per cent by the time Carlsberg acquired an equity stake.24 It lost more market share before Carlsberg revamped the brand in 2001.

This equity stake was gradually increased until Carlsberg acquired 100 per cent and delisted Okocim from the stock exchange in 2004 – a staged acquisition. Even with shared control, Carlsberg obtained control over crucial aspects of the business by appointing its own people to key positions. Local media believed that shared ownership would be a long-term arrangement but at Carlsberg headquarters the aim was to attain full equity control. This strategy gave Carlsberg market access and partial control, and the option to increase its equity by buying out minority shareholders.

During the first five years, Carlsberg was primarily concerned with acquiring assets, turning the operations profitable and introducing the Carlsberg brand for the premium market. However, major acquisitions by its global competitors, Heineken and SAB, pressured Carlsberg to become more aggressive. It needed more than Okocim to challenge them, and thus pursued a strategy of multiple acquisitions. In 2001, Carlsberg-Okocim acquired two breweries, Kasztelan and Bosman, from German brewery Bitburger. In the same year, Carlsberg took over Dyland in the Netherlands, which owned the Polish brewery Piast – an indirect acquisition. In this acquisition drive, Carlsberg acquired market share and several regional brands.

Carlsberg pushed forward with integrating operations and creating a coherent brand portfolio after it had built a broad base of resources, in particular local brands, and trained staff for both production and marketing. In 2001, the portfolio was consolidated to create distinct products for different market segments. Thus, the number of local brands was reduced, while some acquired brands were replaced with new ones. Carlsberg and Okocim were positioned, respectively, as international and national premium brands, while Kasztelan, Bosman and Piast were strengthened in their specific regional markets. Moreover, Carlsberg integrated its four breweries in Poland under joint brand management. Production was reorganised to achieve economies of scale, reduce the number of production sites and increase productivity at the remaining plants.

After consolidating the brand portfolio, Carlsberg launched a major branding initiative in May 2002 to reposition the Carlsberg brand. The market share was hence increased from 0.2 per cent to 1.5 per cent, and Carlsberg overtook Heineken (at 1.2 per cent) as the leading international brand. Euromonitor analysts were impressed by this spectacular growth: “The sales of the Carlsberg brand increased by over 700 per cent in 2002. This growth was the result of a good promotional campaign based on a well-balanced marketing strategy, including TV commercials which consumers liked from their launch. Introducing a new disposable 500 ml bottle also helped.”25 At the same time, the portfolio of regional brands was streamlined, while new brands such as Harnas were introduced to serve niche markets. The product portfolio therefore served all major segments of a highly segmented industry and the sales strategy emphasised the full range of Carlsberg products. Carlsberg boosted its market share to 14.2 per cent in 2002 (see Exhibit 7). From 2004, the integration extended beyond Polish borders, as Carlsberg affiliates in different European countries began sharing production capacity.

Even though Carlsberg was a relatively late entrant into Poland, this multi-track strategy laid the foundation for Carlsberg to become the third-largest brewer in that country. Continuous investment, development of niche brands and integration of separate operations enabled Carlsberg to challenge the market leaders and raise profitability.

Compared with Poland, Lithuania offers a much smaller, less regionally fragmented, market with fewer players. Carlsberg therefore attained a dominant market position at a much earlier stage and came into conflict with the competition authorities. Also as a consequence of the smaller market size, Carlsberg's activities in Lithuania were integrated in a supra-national operation covering all of the Baltic States.

Carlsberg acquired nearly full ownership of local market leader Svyturys in 1999. Around the same time, BBH acquired two breweries: Utenus Alus and Kalnapilis. The merger with Orkla, which owned 50 per cent of BBH, strengthened Carlsberg's position in Russia and the Baltic States (see Exhibit 9). In this way Carlsberg expanded in Lithuania as part of a global merger that extended its reach in the entire region. This indirect acquisition gave Carlsberg market leadership, but the Lithuanian competition authorities intervened because the joint market share exceeded 40 per cent. Kalnapilis was then sold, while Svyturys and Utenus Alus were integrated with BBH's operations in the Baltic States. Carlsberg was established as a premium brand, supported by two domestic brands. The strong market position enables Carlsberg's Lithuanian affiliate to become one of the most profitable operations in emerging economies.

Vietnam has, compared with Poland or Lithuania, a much lower per capita income, with a less developed brewing industry. There is therefore a larger distance between the small, high-margin premium market and the regionally fragmented mass market.

Carlsberg entered the market at a very early stage, by establishing two JVs with local state-owned firms in 1993. In part this entry was motivated by the availability of co-funding from the Danish investment fund IFU, as Vietnam became a priority partner for Danish development policy. The JV mode allowed for an early mover advantage in a fast-growing industry, when regulatory constraints did not permit acquisitions and local breweries were part of state-owned conglomerates. Both JVs placed from the outset a strong emphasis on the development of the new local brands: Halida (derived from “Halimex + Dan Mach (Denmark)”) and Huda (“Hué + Dan Mach”). The local brands were brewed with Carlsberg technology but adapted to local tastes, being made less bitter than European beers and suitable for consumption ‘on ice’. Two global brands were introduced in the early 1990s, but the Tuborg brand was later withdrawn as local demand in the premium segment proved insufficient. The Carlsberg brand serves the small but fast-growing demand in the premium segment, especially in northern Vietnam.

The local partners transferred part of their existing operations to the JV, including production lines previously built through a turnkey project with a Carlsberg affiliate. Carlsberg maintains control indirectly through its brand name, by having at least one expatriate permanently based in Hanoi, and - initially - by having a Danish financial investor as a partner. Even without majority ownership, Carlsberg engaged in major training and restructuring investments.26 After several years of losses, both JVs generated handsome profits, which were largely generated by the local brands. This experience illustrates not only the power of local brands in lower income markets, but also the need for multi-year horizons for entry strategies in emerging economies.

In 2003, Carlsberg bought out the investment fund and increased its equity in the JVs to 50 per cent and 60 per cent respectively, while the role of the local partners in Vietnam remained unchanged. In 2005, the production capacity limits were reached and Carlsberg considered a further expansion. A new agreement was signed with its main local competitor, Hanoi Brewery. Early entry required compromises with respect to control arrangements in the local JVs, but allowed Carlsberg to build a first-mover advantage and strong local brands, and to position its Carlsberg brand in the still small but growing premium segment.

China offers a much larger market than any of the previous countries, but it is highly fragmented regionally, especially in the brewing industry. Carlsberg first entered China through exports in 1987 but it did not commit major resources until 2003. In the early 1990s Carlsberg undertook the first steps in brewing inside China (see Exhibit 9). Huizhou Brewery in Guandong was licensed to brew the Carlsberg brand in 1991, and in 1995 Carlsberg acquired 99 per cent of the equity of the firm. It produced a local brand, Dragon 8, and by 2006 this became the main base of the Carlsberg brand for all of China.

In 1998, Carlsberg opened a US$80m greenfield brewery near Shanghai to produce premium beer. However, following losses over several years, Carlsberg sold its equity stake to Tsingdao, a leading brewery in the North of China, at a loss. Apparently Carlsberg overestimated the growth of the premium segment and underestimated the pace of upgrading of local brands and the marketing drive of international competitors, such as Sapporo of Japan.

After the divestment, Carlsberg found itself in a relative latecomer position in China. In many costal areas, the brewing industry was becoming highly competitive as local breweries and global players rapidly consolidated and by the turn of the millennium the potential for late entrants was limited.

Carlsberg therefore designed a new strategy that built on its experience across emerging economies. Its “Go West” strategy aimed to establish market positions by acquiring equity stakes in the western provinces of China. Carlsberg identified and systematically penetrated these ‘virgin territories’ of the global beer industry. In 2003-4, it acquired equity stakes in five breweries from Kunming in Yunnnan province to Wusu in Xinjiang province, and established a JV in Qinghai province, which lacked a strong local brewery. By way of multiple acquisitions, Carlsberg acquired more than 50 local brands, including two nationally-known brands, Huanghe (Yellow River) and Lhasa. The branding strategy for western China focuses on local brands that at some point in the future may be complemented by the Carlsberg brand. In the coastal regions, Carlsberg pushes the global brand, brewed in Guandong, and a newly-created “Carlsberg Chill” brand that targets younger consumers and the nightlife scene in the big cities.

The market shares in some of the western provinces are quite impressive, in particular in Xinjiang (95 per cent) and Ningxia (80 per cent). However, these provinces are only slowly catching up with the economic growth of China, and per capita beer consumption is well below the national average of 22 litres. Carlsberg's new China strategy has a long time horizon, and the partial acquisitions may well turn into staged acquisitions. However, it is too early to comment on the success of this strategy.

Market positioning and entry strategies are important for success in emerging economies, and they have to reflect the opportunities and challenges in the specific local context. Markets are often fragmented, with major differences in volumes and margins between global and local brands. Many MNEs focus on their global brands, while others, such as SAB, focus on managing operations efficiently under emerging market conditions and with local brands. As Prahalad argues, such a strategy requires not only the development of local brands, but also business concepts that fit the context. We have argued that investors can combine local and global strategies, but they need to develop appropriate operational capabilities for the specific local context. The Carlsberg case illustrates that such a strategy is complex and needs to be implemented over long time horizons.

The optimal combination of local and global brands depends on the firm's resources and capabilities (see Exhibit 2). MNEs with global brand recognition and the organisational capabilities to support the brand in far-flung places may perform best with a global brand strategy. Firms with operational knowledge in building brands and managing production in emerging economies may be best served by developing a portfolio of local brands.

A multi-tier positioning is a more ambitious strategy that may to lead to long-term market leadership. Yet it requires both a global brand and local operational capabilities. Synergies may be realised by sharing distribution networks and by investing in the global brand in anticipation of rising demand. The Carlsberg case illustrates how multi-tier branding allows a company to profitably develop the mass market while creating strong positions in the growing middle class-orientated premium market.

To build a market position, foreign investors need complementary context-specific resources that can be obtained through a JV or by acquiring a local firm. The appropriate design (rather than choice) of entry mode is crucial to capture local resources without losing control over one's own resources or being drawn into a complex enterprise transformation processes. Moreover, the entry strategy needs to allow for strategic adjustments and increases of resource commitments to adapt to environmental change. As emerging economies tend to be highly volatile, competitive advantages may accrue to those best able to adapt to changing circumstances. This flexibility can be achieved in different ways. A staged acquisition or JV provides opportunities to accelerate investment if and when market opportunities arise. More aggressive modes such as full or multiple acquisitions require more upfront resources, but provide full control over the operations and the ability to change the business strategy.

The Carlsberg case illustrates the innovative ways by which foreign investors arrange their acquisitions to overcome obstacles in emerging economies. Carlsberg accelerated its investment from initially low or moderate commitment. The partial acquisitions (Poland) and JVs (Vietnam) provided footholds and made the best use of available resources and acquisition opportunities at the time. However, shared ownership creates challenges for knowledge transfer and restructuring and for co-ordinating strategic changes with the local partners.

In its drive to establish strong market positions, Carlsberg added substantial investments to the initial operation. The combination of different modes and flexible adjustment of the strategy facilitated access to crucial market assets, especially brand names and distribution networks. Although Carlsberg often missed the opportunity to be the first in a new market, it succeeded in establishing a strong market position as number three in Poland, number two in Vietnam and number one in Lithuania and some provinces of China.

The Carlsberg case provides interesting insights how marketing and acquisition strategies may be adapted to local market conditions, and how entry strategies vary in their commitment (Exhibit 4). However, transfers of these insights to other industries should bear in mind that brewing is a culturally-embedded industry with high degrees of loyalty to local brands. Other consumer goods, for instance technology-driven appliances such as digital cameras or I-pods, may experience much faster global convergence as innovations in Asia diffuse to Europe in a few months. In such industries, global brands dominate while local brands have, at best, a supportive role, and required local assets relate primarily to sales outlets and after-sales service. The relevance of local assets and the motives to acquire local firms, can vary considerable across industries.

Section snippets

Conclusions

Our paper offers a number of insights for managers designing or implementing an emerging economy strategy. Our Exhibits can help managers to analyse key issues for market penetration and acquisition strategies:

  • Foreign investors may position themselves in the premium segment, the mass market or combine both in a multi-tier strategy (Exhibit 1). The latter may often be most promising in terms of the long-term market position, yet it needs to be supported by a combination of global brands and

Klaus Meyer is Professor of Business Administration at the University of Reading, UK. He holds a PhD from London Business School and conducts research on business strategies in emerging economies, with special focus on the entry strategies of multinational enterprises. His work has been published in scholarly journals such Journal of International Business Studies, Journal of Management Studies and Journal of Comparative Economics. Two recent books with Saul Estrin are Investment Strategies in

References (28)

  • K. Uhlenbruck et al.

    Organizational transformation in transition economies: Resource-based and organizational learning perspectives

    Journal of Management Studies

    (2003)
  • J.P. Doh et al.

    Reassessing Risk in Developing Country Infrastructure

    Long Range Planning

    (2003)
  • J. A. Quelch, Global Brands: Taking Stock, Business Strategy Review 10,...
  • M. T. T. Nguyen: An investigation into conspicuous consumption in a transitional economy: A study of emerging urban...
  • Cited by (114)

    • Integration of knowledge and enhancing competitiveness: A case of acquisition of Zain by Bharti Airtel

      2020, Journal of Business Research
      Citation Excerpt :

      Furthermore, the holding firm uses its knowledge and experience, technological resources and exploitive synergies (Gold, Malhotra, & Segars, 2001; Miller, Fern, & Cardinal, 2007) to maximize performance as a part of changing the business environment (Pablo & Javidan, 2009). Effective acquisitions are primarily known for their achievements in economic improvement, gaining market access (Inkpen, 2000; Meyer & Tran, 2006) and internationalization of the business. A well-researched acquisition offers instant access to the external assets of a firm (Al-Laham, Schweizer, & Amburgey, 2010; Dhir & Mital, 2012) and many improvements in productivity and management.

    • Actualization of growth potential in international joint ventures: The moderating effects of localization strategies

      2020, Journal of World Business
      Citation Excerpt :

      The literature has thus focused on growth options as bases for MNCs’ preferential access to future growth opportunities and the development of knowledge for subsequent investment (Kedia, Rhew, Gaffney, & Clampit, 2016; Kogut & Chang, 1996; Song, 2017). Previous research on growth options in FDI has examined the growth options value of international investments in general (e.g., Chi, 2000; Reuer & Tong, 2005; Tong et al., 2008) as well as firms’ static decisions, including entry mode choices (Brouthers, Brouthers, & Werner, 2008; Li & Li, 2010; Meyer & Tran, 2006) and ownership configurations within international joint ventures (IJVs) (e.g., Cuypers & Martin, 2010; Tong et al., 2008). Going beyond the initial choices of growth options investments, some prior studies focused on growth options exercise, including the drivers or conditions of exercising growth options (e.g., Folta & Miller, 2002; Kumar, 2005; Miller & Folta, 2002) and subsequent investment changes under reduced uncertainty (Fisch, 2008; Song, 2017).

    View all citing articles on Scopus

    Klaus Meyer is Professor of Business Administration at the University of Reading, UK. He holds a PhD from London Business School and conducts research on business strategies in emerging economies, with special focus on the entry strategies of multinational enterprises. His work has been published in scholarly journals such Journal of International Business Studies, Journal of Management Studies and Journal of Comparative Economics. Two recent books with Saul Estrin are Investment Strategies in Emerging Economies, (Elgar, 2004) and Merger and Acquisition Strategies in European Emerging Economies (Palgrave, forthcoming 2006).

    Yen Thi Thu Tran is a PhD candidate at the Department of Industrial Economics and Strategy at the Copenhagen Business School. She holds an MBA from the Asian Institute of Technology in Bangkok, Thailand. Her current research focuses on industrial dynamics and innovation in diverse settings such as emerging markets and creative industries including the fashion industry. She also published, with Klaus Meyer and Hung Vo Nguyen, “Doing Business in Vietnam” in the Thunderbird International Business Review (2006).

    We thank the Social Science Foundation Denmark for sponsoring this research as part of the MASEE project. We also draw on earlier research sponsored by the Department of International Development (UK). We thank our contact persons at Carlsberg and our research partners in Poland, Lithuania and Vietnam, and Bent Pedersen (Copenhagen Business School) and Zeng YuPing (Peking University) for sharing their insights in the Chinese brewing industry. Comments by Arnold Schuh, Mike Peng, Sheila Puffer, Tina Pedersen and Peter Krag as well as conference participants at the 2nd EIASM workshop on International Strategy and Cross-Cultural Management in Edinburgh University, and seminar participants at Copenhagen Business School are gratefully acknowledged. All errors remain the authors' own responsibility.

    View full text