comment briefs
12
The Third
World
Goes to Market
Briefs
When the Indian conglomerate Tata
Enterprises bought Britain’s Tetley
Tea, the world’s second largest tea
company, last February, it undertook
much more than simply the largest
overseas acquisition ever made by an
Indian company. Tea, of course, was
critical in helping the East India
Company, the famous trading com-
pany founded in London in 1600,
develop into one of the strongest eco-
nomic forces of its day and one of
the most lucrative components of
Britain’s colonial empire. So Tata was
reversing history — and hinting at
things to come as developing nations
start to compete in areas far beyond
traditional primary production.
As Tata’s vice chairman, R.K.
Krishna Kumar, put it, the deal rep-
resented an important first step in
bridging the “historic gap between
producing countries and consuming
countries.” His reference is to a cen-
tral grievance of developing nations:
that Third-World producers — not
just of tea, but also of important
commodities such as oil, sugar, and
coffee — don’t really earn all they
should. Why? Because when firms in
the developed world control the dis-
tribution channels, they capture a
disproportionate share of earnings,
leaving little for the producers.
Worse, the decade-long decline in
raw materials prices has squeezed
producers even more.
In the 1970s, developing nations
addressed this issue with cartels,
which were supposed to reduce price
fluctuations and transfer market
power (and profits) from distributors
in developed nations to producers in
developing nations. Outside the oil
industry, however, cartels have
proved merely transitory. And even
the oil cartel has been notable in the
past 10 to 15 years for its inability to
control prices.
Tata’s Tetley purchase suggests a
new model to reorient profits in pri-
mary goods production — the verti-
cal integration of commodity indus-
tries, with producing nations in con-
trol. Imagine a Tata that ran every-
thing from growing and wholesaling
to the establishment and marketing
of “tea rooms” (to take a leaf from the
Starbucks craze).
Such thinking, however, confuses
the symptom with the disease. Devel-
oping countries typically haven’t con-
trolled the distribution channels for
their commodities because they
haven’t had the expertise to market to
developed countries. In the 18th cen-
tury, India’s ruling Moghuls would
have found it difficult to run the
shipping, inventory, and sales opera-
tions the East India Company car-
ried out.
That makes Tata’s acquisition of
Tetley of even greater significance
than it first appears to be. The pur-
chase was possible solely because Tata
now has more business expertise than
Tetley. India not only won, it beat
England at its own game: business.
This proves that the Third World is
forming the talent not just to grow
and extract, but also to sell around
the world. That is why India’s — and
every developing country’s — eco-
nomic growth depends crucially on
the development and success of firms
like Tata.
Stephan-Götz Richter
Online Exchanges:
The Death of
strategy + business issue 20
Innovation?
Electronic business-to-business (B2B)
exchanges allow buyers and sellers to
transact business efficiently, often

Stephan-Götz Richter
(srichter@tafnet.com) is pub-
lisher of “TheGlobalist.com,”
an online magazine about the
global economy (www.the
globalist.com).
C.V. Ramachandran
(ramachandran_cv@bah.com) is
vice president in the operations
practice at Booz-Allen &
Hamilton and leads the firm’s
thinking on the impact of elec-
tronic commerce on buyer-
supplier relationships.
Simon Caulkin
(scaulkin@easynet.co.uk) writes
a weekly management column
for The Observer in London. He
was named the U.K.’s 1997
Industrial Journalist of the Year
by the Industrial Society.
Horacio Rozanski
(rozanski_horacio@bah.com) is a
vice president of Booz-Allen &
Hamilton based in Cleveland. He
specializes in developing mar-
keting strategies across a range
of industries.
John Micklethwait
(johnmicklethwait@economist
.com) and Adrian Wooldridge
(adrianwooldridge@economist
.com) work for The Economist.
They are the authors of A Future
Perfect: The Challenge and Hidden
Promise of Globalization (Crown
Business, 2000), www.afuture
perfect.com.
comment briefs
Allen Weiss
(aw@marketingprofs.com) is the
David and Jeanne Tappen Fellow
and associate professor of mar-
keting at the University of
Southern California. He is the
editor of the Web site
“Marketing on the Web”
(www.marketingprofs.com).

13

through online auctions, and are the
latest manifestation of the need to
improve near-term margins by driv-
ing supplier prices lower. The natural
tendency of most suppliers is to err
on the side of overly aggressive price
reductions, rather than striking a
balance between near-term reduc-
tions and long-term investment in
product and process innovation.
Since every company is a supplier at
some level, blind use of electronic
auctions threatens every industry’s
ability and motivation to innovate
and grow on a sustainable basis.
Ford Motor Company, for exam-
ple, recently reported completing a
large automotive tire purchase at dou-
ble-digit price reductions through an
online auction. This transaction is
surprising in two ways. First, tires
would not appear to be auctionable
because they are a highly engineered
component that plays a significant
part in the development of the prod-
uct, since they affect vehicle noise,
vibration, harshness, emissions, and
fuel economy. Second, a supplier was
willing to win the business at a price
so low that it could not possibly sur-
vive over the long term if it were to
maintain the operating margins gen-
erated by the auction. (Although the
same behavior could have occurred in
a nonelectronic auction, the pressure
from observing rapidly declining
prices in a short transparent electron-
ic bidding process creates nonrational
behavior in suppliers.)
Whether such behavior kills
innovation in an industry will depend
on the unique characteristics of that
industry’s supply environment. Where
generic, commodity-like, or easily
specified products prevail, and where
the supply base is fragmented, elec-
tronic market exchanges can fulfill
buyers’ and suppliers’ needs to lower
prices and increase market share,
respectively, with modest incremental
investment. In contrast, supply envi-
ronments characterized by a high
degree of customization and/or tech-
nology innovation require customers
and their suppliers to collaborate
closely to develop truly innovative
solutions. Taking advantage of the
Internet, buyers can share design and
engineering specifications in an inter-
Blind use of electronic auctions
threatens every industry’s
ability to innovate and grow.
active real-time mode without expen-
sive electronic data interchange link-
ages, and expand the role of innova-
tion across a broader universe of
qualified suppliers. The emphasis is
on innovation, not price reduction.
Consequently, the right answer
for each company is to separate the
elements of its spending into those
that should be in an electronic market
exchange or auction, and those that
should be procured more systemati-
cally and thoughtfully. The moral of
the story: Do not participate in B2B
exchanges that stifle innovation in the
critical aspects of your product or
service offering.
C.V. Ramachandran
Europe’s
B2B Benefit
By every conceivable measure —
Internet access and use, spending on
comment briefs
14
America’s early dominance
in consumer e-commerce
may not translate into B2B
supremacy.
the Web, startup rates, number of
incubators, venture capital provision
— the U.S. is as far ahead of Europe
in e-commerce as the Web is of the
printing press. Yet, at a March debate
in London to launch 2becom.com,
the Oracle Corporation’s online mar-
ketplace for European e-entrepre-
neurs, two-thirds of a media- and
industry-dominated audience backed
the provocative notion: “This house
believes that U.K./European dot-
coms will resist U.S. dot-com colo-
nization.” What accounts for their
confidence? The fact that America’s
early dominance in consumer e-com-
merce may not translate into busi-
ness-to-business (B2B) supremacy.
A different and distinct e-ecology
has been quietly taking shape in the
Old World. For a start, while in the
U.S., dot-coms got a huge head start
over bricks-and-mortar rivals, in
Europe there is less of a gap between
startups and followers. In addition,
there are signs that Europeans may be
more loyal to established companies
and brands — and consequently less
open to new ones — than Americans.
All this makes many observers believe
that large European corporations are
set to take a bigger share of the B2B
landgrab, especially since some of the
wind has gone out of the IPO mar-
kets for startups.
What’s more, Europe’s comfort
with diversity may be exactly what’s
needed to succeed in the B2B mar-
ketplace. Selling industrial supplies to
small firms across Europe’s highly
divergent cultures is quite a different
verre de vin from selling global prod-
ucts like music CDs and software to
consumers. And while U.S. B2B
startups, busy fighting rivals for lead-
ership in the U.S. market space, have
yet to figure out how to adapt their
offerings to 15 different European
markets, European companies are
obliged to combine technological
scale with local scope from the start.
It’s a necessity that will stand them in
good stead as they extend their reach
to the U.S. — a scale-up, certainly,
but not a difference in kind.
Eurowidgets.com as a future mar-
ket leader? Don’t rule it out.
Simon Caulkin
The Promise
in Digital
Branding
A brand is a promise, and history
shows that strong promises can create
lasting bonds with consumers. Across
21 consumer product categories stud-
ied last year, 17 of the brands with
No. 1 shares in 1923 were still in the
top three in 1998. Can digital brands,
which are continually shifting their
product or service offerings, and even
their value propositions, possibly
have the same longevity? Yes — but
only if their stewards understand that
strategy + business issue 20
customers, not products, are the
essence of the brand.
The history of successful offline
franchises shows that branding is nei-
ther easy nor accidental. The 17 top
comment briefs
16
brands that survived the past 67 years
— their number includes Kellogg’s,
Kodak, and Gillette — may have
changed during that period, but their
underlying value proposition has
remained fairly consistent. For exam-
ple, from the launch of the Brownie
camera in 1900, through the Insta-
matic, the single-use camera, and
now PhotoNet online, the Eastman
Kodak Company has continued to
strive to make photography ubiqui-
tous and fun.
Where offline brands have suc-
ceeded through stability, digital
brands have stressed change. That’s a
big obstacle for a new brand with no
links to a consumer base. It’s hard to
create an emotional connection with
something that is constantly chang-
ing (consider how few people end up
marrying their childhood sweet-
hearts). Yet digital brands, subject to
competition from every corner, at any
moment, have no choice but to
evolve continually.
To overcome the problem, elec-
tronic brands must stretch beyond
their products or services to promise a
timeless benefit relevant to a specific
consumer segment, but extendable to
adjacent segments over time. More
concretely, consider the following
thought-starters:
1. Recognize that, if successful,
your brand will be around much
longer than your current offering.
Amazon.com Inc. is no longer spe-
cializing in what it sold on day one —
but you and I still think of
Amazon.com as a bookstore!
2. Develop your promise instead
of promoting your wares. For exam-
ple, online brokerages may want to
rethink brands built only on cheap
trades and fast information access.
How about targeting the financial do-
it-yourselfer with a promise of safety,
privacy, high-quality information,
and value?
3. Do relevant consumer re-
search. Make sure the segment you
are targeting will continue to be
viable five years from now. Where, for
example, are the techies who started
this whole thing? Where will today’s
MP3 fanatics be in 2005?
4. Look for higher-level position-
ing themes. Build an emotional bond
with your consumer that goes beyond
the Web’s current reliance on price
and convenience. Michelin sells tires
by talking about babies, not rubber.
5. Favor methods that enhance
dialogue — either between you and
your consumers, or among your con-
sumers — over one-way communica-
tions like TV or banner ads.
6. Consider the “option value” of
your brand, and invest in areas that
will maximize and extend your
brand’s potential. Even after the
recent tumble, most e-commerce val-
uations are a function of opportuni-
ties grander than the initial product
or service offering can support. The
key is to stop assuming that the
upside of the brand (its option value)
is infinite, and to deliberately position
the brand against a set of possible
future offerings — even before know-
ing which ones will pan out.
Horacio Rozanski
Globalization
Is No Fait
Accompli
From Wall Street to Silicon Valley,
most businesspeople assume that
globalization, driven by economic
efficiency and technology, is as
inevitable as the traffic lights chang-
ing in Palo Alto — protests in Seattle,
London, and Washington, D.C.
strategy + business issue 20
notwithstanding.
In fact, the backlash against glob-
alization is real and growing. Those
who dismiss it show a woeful grasp of
three things: human nature, history,
comment briefs
18
and even globalization itself.
Globalization is not a fact, but a
process — rather like waves washing
onto a beach. Deregulation, technol-
ogy, and capital markets are the winds
driving these waves, and they have
left behind an economy that is much
less integrated than most people
think. There is always an undertow:
The same winds that whip up a glob-
al television channel like CNN also
blow in ever-increasing local pro-
gramming.
The next misunderstanding is of
human nature — and how strongly
people’s actions are based on self-
interest. In his Theory of Moral Senti-
ments, Adam Smith compares the
pain you would feel if you lost your
little finger to the distress you would
feel over the news that “the great
empire of China, with all its myriads
of inhabitants,” had been swallowed
up by an earthquake. You would be
hugely shocked, he says, but you
would not offer up your finger for
them. Personal interests take prece-
dence. That is why Bill Clinton, an
avowed supporter of globalization,
backed the unions during the WTO
tumult in Seattle — to help Al Gore’s
political chances at home.
History reinforces this. Econom-
ic efficiency and technology have
often been trumped by local political
prejudice. A century ago the world
Your Pirates
was, by many measures, much more Are Your
global than today. Capital and people
moved around the world with ease, Customers
propelled by forces far more radicallyThe music industry is up in arms over
globalizing in their time than the MP3.com and Napster.com, two
Internet is today — the telephone, Web services the major record labels
electricity, and motorized transport. say facilitate illegal downloading of
Businesspeople at that time, particu- copyrighted songs. What the record
larly in the Anglo-Saxon world, pre- industry needs to do is stop focusing
sumed that the world would get only on litigation and start thinking about
more integrated. A Great Depression unbundling its products.
and two world wars showed how The large-scale piracy the major
wrong they were. labels decry reveals an unmet need —
That does not mean another in this case, for customization.
depression or war is destined to stop Customers want to mix and match
the winds of globalization. The biggerindividual songs from different artists
threat is of regional trade blocs in the same way they can now mix
becoming trade fortresses, temporary and match the components of every-
capital controls becoming perma- thing from Dell computers to GM
nent, and people demanding cultural cars. This is a radical departure from
protection against McWorld. the music industry’s reliance on
If globalization does not find a prepackaged album sales, the corner-
political defense to match its eco- stone of its current business model.
nomic efficiency, if it does not base its That model must change. Con-
appeal on liberty and diversity rathersider three alternative pricing formats
than the dry language of IMF reports, for digital downloads.
then protesters’ jibes that “IMF/ 1. Subscription pricing. Cus-
strategy + business issue 20
World Bank start shakin’, today’s pigstomers pay a specified price to play
are tomorrow’s bacon” will be less of a
songs directly from a server for a pe-
laughing matter. riod of time. Restrictions on copying,
John Micklethwait and however, would be difficult to en-
Adrian Wooldridge force. That, plus consumers’ desire

TUCK
AT DARTMOUTH
2000
EXECUTIVE
P R O G R A M S
for portable music, would make this
option unpopular.
2. Per-unit pricing. A more likely
approach is being explored by for-
ward-thinking independent labels.
Emusic.com Inc., for example, sells
songs from a wide range of independ-
ent or small-label artists for 99 cents
each. Were the major labels to follow
this format and use a low price point,
they could generate sales across a wide
range of their catalogs, because cus-
tomers would be more willing to try
out non-hit songs.
3. Micro-payment pricing. Here,
consumers download songs that self-
erase when the paid usage period
expires, after five plays or two days,
for example. Currently, this type of
pricing scheme is used to give users
low-cost software trials and could be
used similarly to induce subsequent
purchases of compilations.
GENERAL MANAGEMENT AND
LEADERSHIP PROGRAMS
Tuck Executive Program
July 30–August 24, 2000
Gateway to Business Management
February 6–11, 2000 (Orlando, Fla.)
May 21–26, 2000
November 5–10, 2000
Global Leadership 2020
A Consortium Program in 3 Modules
"The greatest
limitation to
growth is the
availability of
talented global
leaders."
Vijay Govindarajan
Faculty Director
Global Leadership 2020 Program
As major labels provide music
over the Internet, their CD sales will
decline. But clearly, with a little cre-
ativity, they can recover the $4 of rev-
enue they lose on each unsold CD. In
addition, digital downloads can pro-
vide benefits, such as enabling the
labels to assess more accurately the
demand for each artist and to gather
detailed fan demographics that will
allow them to market their products
more effectively.
Such new price formats would
have ramifications through the rest of
the value chain. While royalty sys-
tems for artists and performers would
need to be restructured, by far the
thorniest issue concerns the structure
of the distribution channels. By sell-
ing songs directly to consumers, the
labels would be essentially competing
with retailers. In fact, a retailers’ trade
group has already filed a federal
comment briefs
SPECIALIZED PROGRAMS
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June 20–23, 2000
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July 23–28, 2000
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for Disrupting the Market
October 15–18, 2000
19
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October 29–November 1, 2000
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For further information, please contact:
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Phone: 603-646-2839 Fax: 603-646-1773
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antitrust lawsuit against Sony Music
for venturing into online sales.
As in the PC industry, however,
a massive restructuring and disinter-
mediation of retailers will take place.
Although niche offline retailers
will probably survive, consolidation
among bigger retailers will favor those
that successfully figure out how to
couple the Internet with their bricks-
and-mortar stores.
The music industry’s challenge is
not isolated. All industries that sell
potentially disaggregated content
(and that means virtually anything
that can be offered in the form of dig-
ital information — most assuredly all
forms of publishing) will face similar
problems. By clutching business
models based on forced bundling,
they may find themselves severely out
of touch with customers.
Allen Weiss