In September 1995, Mauricio Botelho joined Embraer as the CEO. Botelho was a 53-year-old mechanical engineer, a seasoned executive who served on the board of the lead investor in the syndicate that acquired Embraer. When Botelho arrived, along with his long-time colleague Antonio Manso, they did not like what they saw. The assembly line was empty, the mainstay Bandeirante and Brasilia models were outdated, and development had been cancelled on the CBA 123. Botelho later recalled:
When I arrived, we had $330 million in annual losses, a backlog of less than $200 million and 6,100 unmotivated employees. And yet Embraer had a history of products that were to some extent pioneers in the market. First on my agenda was to understand how Embraer got into this position.
Botelho quickly concluded that Embraer had focused too heavily on improving technology, lost sight of its customers and, as a result, lacked a product to serve the customers’ emerging needs. Studies conducted prior
The late 1980s and early 1990s were as difficult for Embraer as the preceding years had been good. The fall of the Berlin wall in 1989 resulted in steep reductions in military spending around the world. A global recession depressed demand for air travel, leading airlines to delay or cancel their orders for new planes. Even as demand contracted, supply grew because European countries supported their local champions’ entry into the regional jet market, spawning new rivals including Aerospatiale (France), Saab (Sweden), Daimler Aerospace (Germany), Fokker (Holland), and Casa (Spain).
Embraer initially responded to these altered environmental conditions by doing more of what had worked in the past. Historically, executives had seen Embraer as an “engineering company” and believed that superior engineering would sustain the company’s success. These strategic frames led Embraer managers to focus on refining and extending their existing turboprop planes, investing more than $280 million on a state-of- the-art turboprop, known as the CBA 123, even as momentum was building for short-range jets instead.
The CBA 123 was to become the most advanced turboprop ever built. But it had two problems. The advanced
In order to succeed in an unpredictable market, companies must respond quickly and effectively to sudden-death threats and rapidly identify and exploit golden opportunities. During periods of relative calm, managers must excel at active waiting by monitoring the emerging situation, identifying and managing potential risks, building slack resources and maintaining internal and external flexibility. Successfully doing any of these is hard enough, but excelling at all of them is daunting. Few companies have done it all as successfully as the jet manufacturer Embraer.
Today, Embraer is the fourth largest aircraft manufacturer in the world, with over twelve thousand employees and $5.5 billion revenues in 2009. By the end of the 1990’s, the company had emerged as one of Brazil’s largest exporters. Over the 1990’s, Embraer won a 40% share of the global market for regional jets, while the market leader Bombardier lost nearly half of its market share over the same period, and number three Fairchild Dornier filed for bankruptcy.
To understand Embraer’s success in the 1990’s, it helps to start at the beginning and understand the company’s origins. The story begins in 1941, when the Brazilian government created an Aeronautics Ministry to
To understand how companies thrive in turbulent markets, Martin Escobari and I studied ten Brazilian companies that thrived despite Brazil’s turbulence during the 1990s. Brahma (brewing and beverages which through a series of acquisitions created Anheuser Busch InBev), Embraer (aircraft production), Votorantim (diversified conglomerate specializing in basic industries), Banco Itaú (banking), Natura (cosmetics), América Latina Logística (logistics), Promon (engineering), Sabó (auto parts), Pão de Açúcar (food retailing), and Aracruz (pulp and paper).
We paired each of the ten with a comparable firm that was less successful in managing turbulence. These paired companies provide a valuable contrast to our more successful firms. The similarities among the more successful companies, as well as the differences between them and their less successful peers, form the foundation for the findings in this book.
There are a few things to note about the companies we studied. First, they represent a broad cross-section of the economy. Most studies of management in turbulent environments have focused on U.S. information technology companies, primarily in the period between 1980 and 2000. By sampling across a variety of industries we hope to glean general insights about managing in unpredictability that would not emerge from a
My last post provided a brief overview of Brazil’s economy and long history of economic turbulence. Even by Brazilian standards, the 1990’s were extremely turbulent. The best way to illustrate the impact of shocks on companies’ ability to build long-term competitiveness is to imagine yourself as the CEO of a Brazilian company in the 1990’s. These are the challenges you would have faced.
The decade began with President Collor freezing all financial assets for eighteen months. This asset freeze caused a liquidity crisis, and companies in certain industries such as retail and consumer goods witnessed sales plunge 30-50% within a few months. Collor simultaneously eliminated an extensive list of preferential incentives and protective tariffs for Brazilian companies, thereby exposing them to direct competition with some of the most competitive and efficient global competitors. In contrast to Mexico’s gradual integration into the North American Free Trade Agreement (NAFTA) over ten years, these changes took place over the span of months in Brazil.
Four years later, Brazil’s government launched a new currency as part of its Real Plan, and inflation dropped from a monthly rate of 47% in June to 3% in August of 1994. You might think that is good news, but inflation
Before introducing the Brazilian champions that succeeded despite volatility, it is worthwhile pausing to discuss the Brazilian economy and economic history as context for the companies that succeeded in the 1990s out of that country.
Brazil has been described as a slumbering economic giant waiting to awake. It is the fifth largest and most populous country in the world, the ninth largest economy (in terms of purchasing power), and the largest market in South America, accounting for up to 60% of South America’s total Gross Domestic Product (GDP) during the 1990’s. Brazil is highly integrated in the global economy. The country is among the world’s top three exporters of tobacco, sugar, orange juice concentrate, soy, beef, chicken, iron, and tin. China is the only country that received more foreign direct investment among the developing countries between 1998 and 2001.
Much of Brazil’s trade was done with the United States, and Brazil was a larger trade partner to the U.S. than Italy, Spain, or India throughout the 1990’s. Despite its impressive accomplishments, many commentators argue that Brazil has failed to fully realize its potential. “Brazil is the country of the future,” as the old joke goes, “and always will be”. Annual growth in GDP averaged a modest 2.5% between 1980 and 2000 versus 10.2% for China, 7.8% for South Korea and 5.7% for India.
Brazil’s progress in recent decades has tended to come in jubilant bursts, including president Juscelino
How can managers survive and thrive in unpredictable markets? To shed light on this question, I and my co-author Martin Escobari, who is now a managing director of Advent International in Brazil, analyzed ten Brazilian companies that managed to survive and thrive amidst the turmoil of the Brazilian market during the 1990’s. In several cases these companies emerged as world-class competitors in global industries including aerospace, brewing and banking.
We published our findings in the book Success Against the Odds. My posts through the rest of the summer will draw on our research and this book to bring to light some of the impressive success stories and the broader principles they illustrate about thriving in turbulent markets.
These firms’ success is an impressive accomplishment, because Brazil is one of the most unpredictable markets in the world. Brazilian managers during the 1990’s faced volatile exchange rates, sporadic availability of capital, inconsistent industrial policy, unpredictable rates of inflation and interest, and sharply increased levels of foreign competition, in addition to the competitive threats, shifting consumer preferences, and potential technological disruptions common to every country.
An elite group of Brazilian companies not only survived this turmoil, but actually emerged stronger at the end of the last decade. They responded quickly and effectively to shocks that threatened their very survival and
The model of emerging market innovation that most people have in mind is a multinational corporation pioneers a novel product or service in their sophisticated home market, drops some features and cuts the price, and then exports the stripped-down innovation into emerging markets.
Increasingly, however, innovation flows the other way. Companies develop a product that appeals to emerging market consumers who combine discerning tastes with low disposable income, then managers quickly recognize that these products would appeal to some segments within mature markets as well.
At a recent London Business School panel on multinationals in emerging markets, I had the chance to discuss this reverse innovation with Paul Bulcke, CEO Nestlé; Anshu Jain, who runs Deutsche Bank’s investment banking business; Vittorio Colao, the CEO of Vodafone; and John Connolly, the global chairman of Deloitte.
- Distinguish between emerging consumers and emerging markets. Paul noted that Nestlé distinguishes
Last week, I moderated a panel on multinationals in emerging markets for the London Business School’s Global Leadership Summit. Four prominent business leaders–Paul Bulcke, CEO Nestlé; Anshu Jain, who runs Deutsche Bank’s investment banking business; Vittorio Colao, the CEO of Vodafone; and John Connolly, the global chairman of Deloitte shared their insights on several topics, including which multinationals (other than their own) they most admired for their success in emerging markets.
People often use the term “emerging markets” as a catch all phrase implying that all countries within this category are broadly similar to one another. In reality, of course, the differences between India and China or Brazil and Russia dwarf their similarities. The heterogeneity of emerging markets raises questions for companies seeking to invest in these countries: How should we prioritize investments across emerging markets? How do we differentiate a more attractive market from a less attractive one? What criteria should we use in evaluating and comparing different markets?
Below I summarize some of the insights on how four different executives from four very different industries evaluate emerging markets.
- Nestlé. GDP growth is important for a food company, of course. In Africa, for instance, GDP has grown at about 5% per year over the past decade. Second, a country or region needs to meet a threshold level of
Yesterday the London Business School held its annual Global Leadership Summit, I moderated a panel on how multinationals can seize opportunities in emerging markets. My panelists were Paul Bulcke, CEO Nestlé; Anshu Jain, who runs Deutsche Bank’s investment banking business; Vittorio Colao, the CEO of Vodafone; and John Connolly, the global chairman of Deloitte. (The podcast of the full panel is here).
Emerging markets are important for each of these companies. Vodafone books 22% of its revenues in emerging markets including India, Egypt, and Turkey. Deutsche Bank earns about €3 billion in these markets. Currently emerging markets account for approximately 32% Nestlé total sales (and more than half the firm’s factories), but Nestlé intends to increase revenues from emerging markets to 45%. Deloitte has about 15% of headcount in the BRIC countries.
One of the questions we discussed was other than their own company, which multinationals do the panelists most admire for their performance in emerging markets. Their answers are interesting.
- Tesco. John noted that by the end of this year, Tesco will have more retail space in Asia than the UK.