Is it worth using copycat as a strategy to build profitable business?
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Is it worth using copycat as a strategy to build profitable business?

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Techno-Latin America’s Environment finally arose on the International Business. ...

Techno-Latin America’s Environment finally arose on the International Business.
The Local Business Leaders built their success on others’ shoulders. In the current connected environment is getting harder to avoid clones overseas. But the “copycat” practice is capable of creating enough value to sustain competitive advantages?”

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Is it worth using copycat as a strategy to build profitable business? Document Transcript

  • 1. Marcus Eduardo de Andrade Campos Executive MBA 71th Class “Is it worth using copycat as a strategy to build profitable business?” Projeto Final apresentado à Diretoria Acadêmica da Business School São Paulo em cumprimento parcial às exigências para obtenção do certificado de conclusão do MBA Executivo. Orientador: Prof. Evandro Paes dos Reis São Paulo 2013 1
  • 2. Este projeto final de MBA/(Executive MBA) está aprovado. ____________________________________ Prof. Armando Dal Colletto Diretor Acadêmico ____________________________________ Prof. Evandro Paes dos Reis Orientador 2
  • 3. Acknowledgement For my family that always believed and support my actions. For those who had the necessary tolerance and patience to deal in a daily basis with the subject, during the constant conversations about the topic during the lunch time as Kelly Fernandes, Rogerio Martins, Alexandre Rocco and Tercio Leal. For friends that directly or indirectly made their contribution to the process like Roger Fratin, Paulo Ahagon, Juliana Andrade, Daniela Guimarães (especially for the grammar review). Especial thanks for new friend made during the research, as Joana Picq who shared her entrepreneurship expertise exchanging long-and-late-e-mails. I want to thanks Stelleo Tolda, who inspired my early professional initiatives and spend his lunch time talking about the begging of MercadoLibre and for sharing essential evidences to analyses. Finally, my gratitude since 2000 for giving me insights and working as a mentor always showing the right path. 3
  • 4. Resumo Apenas nos últimos anos o mercado tecnológico Latino Americano ganhou relevância no cenário internacional, startups locais apareceram no mapa dos investidores estrangeiros. Após a ruptura causada pela Crise Econômica Mundial nos mercados Norte-Americano e Europeu e impulsionados por mudanças demográficas ou econômicas tais como as crescentes taxas de avanço populacional, os baixos custos de desenvolvimento, a ampliação da cobertura territorial em serviços de acesso a internet banda-larga ou celular e o constante aumento na oferta de talentos na região. Analisando a Indústria da Internet nesta região, podemos afirmar que os líderes deste Mercado são empresas que criaram o próprio sucesso sob os ombros de outros gigantes. Com os mercados tão conectados como atualmente, é difícil evitar cópias mundo afora. No mundo dos negócios e também na vida cotidiana esta prática é geralmente rotulada sob o nome de “copycat”, mas quase instantaneamente surge uma pergunta: Para que copiar a ideia de alguém? Esta prática é realmente capaz de criar valor suficiente ao negócio para sustentar vantagens competitivas? Para compreender se um modelo de negócio copiado cria tais vantagens competitivas, este estudo analisa algumas estórias latino americanas de sucesso para entender se o produto da cópia é suficiente e capaz de criar as necessárias barreiras de defesa ao negócio ante novos entrantes, geralmente empresas igualmente clones ou mesmo, a entrada da própria pioneira, a empresa que deu origem a ideia copiada, e ainda se possível desvendar as melhores práticas para criação de um negócio baseado na imitação. O modelo de cópia desenvolvido por Oded Shenkar e descrito em seu livro serve de suporte para este estudo, mas a análise também faz uso de outras teorias estratégicas e diferentes fontes de informação, incluindo artigos de revistas especializadas no mundo dos negócios e entrevistas com alguns executivos pertencentes às empresas citadas ou ao Mercado de Internet. 4
  • 5. Abstraction Just a couple of years ago the Techno-Latin America’s EnvironmentI arose on the International Business Scenario and finally, local startups appeared to the Venture Capitalist’s map. After the disruptive effect caused by the Global Financial Crisis into the US and Europe business systems, this projection was actually a consequence of a series of demographic and economical changes in the area, including the rise of local population growth, lower costs of development at the region, the rise of the broadband infrastructure availability for PCs or mobile devices and the growing pool of talent available in the region. Analyzing the Internet Industry in this region, it can be affirmed that the business leaders are companies that built their success on giants’ shoulders. In the current connected environment is getting harder to avoid clones overseas. The common name of that practice is “copycat”II and instantly a question comes up: “Why copycat someone else’s idea? Is this practice capable of creating enough value to sustain competitive advantages?” To understand if an imitative business really creates competitive advantages, this study analyzes some Latin America’s successful stories to understand their outputs under the perspective of the generation of business barrier to defeat their business against new entrants, other copycats or the pioneer copied company, and if its really possible, to find out which are the best practices to build a business over imitation. The Shenkar’s framework for copy described in his book became the support of the study, but the analysis made use of several other strategy theories and different sources of information, including specialized articles and interviews with some executives inside or outside the mentioned companies. I Williams, A., (2012) The Rise Of The TechnoLatinas: A Full-Fledged Startup Movement Emerges In South America, 16 September, Available at: http://techcrunch.com/2012/09/16/the-rise-of-thetecnolatinas-a-full-fledged-startup-movement-emerges-in-south-america/ (Accessed: 9 March 2013) II Picq, J., (2011) Copycats Versus Innovation in the BRIC World, 25 May, Available at: http://www.thenextwomen.com/2011/05/26/copycats-versus-innovation-bric-world (Accessed: March 2013) 5
  • 6. Table of Content 1. INTRODUCTION: CONCEPTUALIZATION OF COPYCAT ’S PRACTICES ............................. 7 1.1. 1.2. 1.3. 1.4. WHAT IS A COPYCAT PRACTICE?.................................................................................. 7 THE LEGAL BOUNDARIES OF COPYCATS ...................................................................... 8 WHY SHOULD IT BE STUDIED? ....................................................................................... 8 METHODOLOGY .............................................................................................................. 9 1.4.1. SHENKAR , O., (2010) “COPYCATS H OW SMART COMPANIES U SE IMITATION TO G AIN A STRATEGIC EDGE” ................................................................................................................................ 9 1.4.2. O STERWALDER , A. AND PIGNEUR , Y., O., (2010) “B USINESS M ODEL G ENERATION : A H ANDBOOK FOR VISIONARIES, G AME CHANGERS, AND CHALLENGERS” .........................................11 1.5. 2. NARROWING THE DEFINITION: THE SUBJECT OF STUDY ............................................12 LATIN AMERICA LOCAL CONTEXT (INTERNET ON THE EMERGING MARKETS) ...... 13 2.1. THE BEGINNING OF THE INTERNET INDUSTRY ...........................................................13 2.2. ROOM FOR OPPORTUNITY – DOES COMPANIES OMISSION THE REAL RESPONSIBLE TO CREATE ROOM FOR COPYCAT PRACTICES , WHY DID T HIS S CENARIO EMERGE? .........16 3. CASE STUDY MERCADOLIBRE VS. EBAY ................................................................... 17 WHERE TO IMITATE – THE SELECTION OF INDUSTRY OR DOMAIN FROM WHICH TO DRAW THE IMITATION................................................................................................................17 3.2. WHAT TO IMITATE – DEFINING THE OBJECT OF IMITATION: A PRODUCT, A PROCESS, OR AN ENTIRE BUSINESS MODEL ..............................................................................18 3.3. WHO TO IMITATE – DEFINING THE ENTITY BEHIND THE MODEL...............................18 3.4. WHEN TO IMITATE – THE TIMING : CHOOSING THE RIGHT S TRATEGY OF COPYING 3.1. 3.5. 3.6. 3.7. 3.8. 4. CASE STUDY: PEIXE URBANO VS. GROUPON............................................................. 27 4.1. 4.2. 4.3. 5. COPY CONTEXT: THE ACCELERATING PACE OF IMITATION.....................................28 COPYCATS PROLIFERATION: E RODING THE BENEFITS ..............................................28 COPYCAT EVOLUTION: TRYING TO IMOVATE .............................................................29 CASE STUDY: COMPANIES DRAWN FOR COPIES? ..................................................... 30 5.1. 5.2. 5.3. 5.4. 6. 19 HOW TO IMITATE – THE FORM AND PROCESS OF IMITATION ...................................20 THE CORRESPONDENCE PROBLEM ..............................................................................20 IMOVATION CONCEPT: FUSING INNOVATION AND IMITATION ..................................24 OUTSTANDING PERFORMANCE .....................................................................................27 S AMWER BROTHER’S AND THE ROCKET INTERNET. ..................................................30 WHERE, WHAT AND WHO TO IMITATE........................................................................31 WHEN TO IMITATE ........................................................................................................31 HOW TO IMITATE ..........................................................................................................31 CONCLUSION............................................................................................................... 33 6.1. 6.2. INSIGHTS TO S HENKAR’S FRAMEWORK EXECUTION .................................................33 FINAL CONSIDERATIONS ...............................................................................................35 7. BIBLIOGRAPHY ..................................................................................................... 37 8. NOTES ....................................................................................................................... 39 6
  • 7. 1. INTRODUCTION: CONCEPTUALIZATION OF COPYCAT’S PRACTICES 1.1. WHAT IS A COPYCAT PRACTICE? A simplistic definition of Copycat is the behavior where someone copies someone else. Even though it is simple, the definition varies for this interpretation depends on the level of imitation applied in each analyzed context. For those variations, other words are commonly applied to the subject for instance mimics, clones, emulations, reproductions and so on. Psychologists, sociologists and zoologists have been discussing the subject and its implications on human relationships for a long time. Morris, D. (1967)1 addresses the copying behavior, no matter if it is related to thoughts, attitudes, styles or ideas, as a natural tendency in human’s being. He underlined the importance of copying as part of human’s learning process that developed our leadership regarding other animals and also vital to others species survival. According to Shenkar, O. (2010)2 framework, the same behavior and correspondent output are true for companies. A shallow Google’s search provides a wide range of examples about how different disciplinesIII are dealing with the subject. Different professionals entities, books and blogs are engaging into deeper discussions about the impacts of copied ideas within different business systems. They all have its similarities and differences. The context or cultural environment applied to analysis dramatically changes the acceptance of those practices. Asian countries IV are probably the most known addicted culture of “Copycats” and are usually mentioned as “a regular copyrights infringers”, but every culture has its own degree of tolerance regarding the subject. In general, emerging countries are used to import developed countries ideas for business models since they lived until shortly in closed market environments, due to its history of dictatorship. III You can find debates about ethics, plagiarism or consumer mistaken or misled behavior inspired by those practices. For instance, The British Alliance for Intellectual Property (Available at: http://www.allianceagainstiptheft.co.uk/copycat.html, no date) describes the damages of copying branded packages products in consumer’s buying behavior, another example given by Frank, M. et al. (2004) studies the negative impact of copycat’s practices in the returns of Mutual Fund Industry, and Peterson & Gregor (2011) discuss about lawyers common practices of copying each other and its outputs. IV Mente, B., (2004) in his book Japan’s Cultural Code Words, tells about Japanese social behavior called Yokonarabi Syndrome since they first met and copy Korean’s and Chinese’s Technologies and its impact over the European wave of innovation in the 1500s. China is also famous for its cheap products as well as for its forgeries ones, Coghlan, T. describes at his fashion blog about Chinese learning system that are based on copy and not on creativity. Samsung has expanded the concept of copycat as described by Hussain, T. (2006) in his book Diamond Dilemma, but in 2012, the world follow the battle between Apple patent claims against Samsung. 7
  • 8. 1.2. THE LEGAL BOUNDARIES OF COPYCATS Copying practices are eligible for litigations or prosecution when it infringes over copyright’s regulations. The problem is that not all innovative ideas are susceptible to a patent protection; in addition to that, not every country is committed to follow those rules. The exclusive rights vary from country to country accordingly to their own purpose. US regulations also present a high volatility about the topic. From the establishment of United States Patent and Trademark Office, at end of the sixteenth century, until nowadays the appliance of the concepts changed from time to time. Started considering just manufacturing objects, tried to extend to “new methods of doing business” but being hard to define it, they retreated. In the 80’s and 90’s the subject emerges again after the raising wave of patent applications regarding Internet methods of doing commerce. The current definition, that “US patent system is limited to technology and therefore it excludes trade and business expedients”V remains unclear. Note that it’s quite easy when the subject is a manufactured object or a machine that transforms the output but this doesn’t include a business model idea that corresponds to the method of doing trade or business. Back to 1994, members of the World Trade Organization try to define under the “Agreement on Trade-Related Aspects of Intellectual Property Rights”3, rules that include a new set of activities like content producers, industrial designs, and undisclosed or confidential information. As said by Quiros, C. (2012)4, “[if] you copy the idea of the iPad, you’ll be fine, legal or otherwise, as you can see from the plethora of tablets crowding the market. You copy the specific design of the iPad, you are going to have problems, as you can see in the legal battles Samsung and others are fighting with Steve Jobs’ favorite company.” Why reinvent the wheel? Its not allowed to copy a piece of software from another company’s website but its possible to redevelop the same software doing the exactly same thing without infringing a copyright or an issued patent. 1.3. WHY SHOULD IT BE STUDIED? The assumption “An Innovative Company takes-all” is really right or people just have V Article I, section 8, clause 8 of the Constitution Gives Congress the power “To promote the Progress of…useful Arts” by granting patents. The Supreme Court has held that the grant of power is also a limitation on congressional power. Graham v. John Deere Co., 383 U.S. 1, 5–6 (1966). 8
  • 9. prejudice against the copy concept? Go to a bookstore’s business section or read the syllabus of any MBA Program and compare how many studies, frameworks, specialists are related to the word “Innovation” and how many are related to “Imitation”, seems like the other I-word is excluded from the records. The intuitive effort involved to develop innovation, which include researches, trials and errors, measurements, proven track results and all costs related explain why people are resistant to assume copy behaviors, it seems indolent and unfair to use it. Even though, the same books and courses often mention industry standards or teaches how to adapt business process or methods from other companies – which means copying someone’s idea too under the name of “Benchmarks”. From empirical evidence, digital companies, mostly Internet Business in Latin America markets, every now and then made use in some level of “imitation”. Going from user experience standards to entire business model. This study is trying to achieve answers for questions like: How hard it is to copy an entire business model from a foreign country and put it into work inside a completely different environment? Is there any valid standard in place that is easy to reproduce in order to structure a business copy? Does the output value enough to create profit and to build barriers not only to protect the market share from the original idea’s owner and from further Copycats? 1.4. M ETHODOLOGY The purpose of this study is the appliance of Shenkar’s framework on the context of successful Latin American’s Internet companies, validating the model under the aspects of adherence of the actions and requirement abilities of those entrepreneurs. To support the rational, the use of Business Model Canvas helps to realize which components of the business model needs more attention when the copying behavioral are in place. 1.4.1. SHENKAR, O., (2010) “COPYCATS HOW SMART COMPANIES USE IMITATION TO GAIN A STRATEGIC EDGE” The framework suggests that following a structured process that starts with a carefully selection of the copy domain, working into deep reflection or cause-effect analysis around the 9
  • 10. competences and activities required to clone the model, providing the necessary adaptations to find out the same favorable outcome to overpass the correspondence problem but also adding same innovation around it, what he calls “Imovation: Fusing Imitation + Innovation” will create the room for success. As said by the author: “The great thing about being an imitator is the pioneer bears the costs of figuring out how to make a viable product and seed a sizable enough market to make that product worthwhile. The imitator can save on research and development costs because no dead ends are pursued. It’s also cheaper to market when customers are familiar with the product on offer. The benefit of hindsight also means imitators can capitalize on the shortcomings of earlier generation products and come to market with something which is demonstrably better and often cheaper as well. Imitators are also aware of the need to differentiate so it’s not at all unusual for imitators to bring several models to the marketplace which offer superior features.” – Shenkar, O. (2010) He defines six key competences in order to achieve success and describes what are necessary steps in order to achieve it: The complete view of the Imitation Strategy Framework: The questions made on the first box, drives the analysis: Where to Imitate5 refers to the sector, the domain of copy, this could be a new technology, a marketing approach or an entire business model, always regarding to Patent and Copyrights issues; What to Imitate 6 is the decision about what to imitate, driven by strategic intent of the copier, needs to consider potential key differentiators, defeat capabilities and possible contradictions and conflicts inside the model; 10
  • 11. Who to Imitate 7 is the search for legitimacy on the copied-object, copying something that already proves its value is especially important during times of high uncertainty but it is also important to avoid products and process with universal applicability because using just industry standards could erode the benefits; When to Imitate 8, drives the concern explicit about timing, the forth box describes the three strategies related to this decision “The Fast Second”, “The Come from Behind” or the “Pioneer Importer”. Our study explores just the Pioneer Importer Strategy which consist in a late entrant that establishes itself as the first entrant in another region or product market and in essence, explores asymmetry across markets but faces a higher degree of correspondence problems to solve; How to Imitate 9 is the execution and tactical plan demanded. The decision has to do with the pattern, process and sequences by which a company identifies an imitation target and set up a process for analyzing, adapting, and implementing the imitation, it’s time to act and create a roadmap to accomplish the work done on the previews steps of the framework. It is also refers to the second box which represent the challenge of finding solution for the correspondence problem10 would make the imitation as relevant and meaningful as the original to fit into another culture and system. To close the framework, there is an analysis of the value preposition of the imitation, related to cost savings, risk and benefits that will appear once the copy is started. Shenkar’s 10 Rules for Imovation, which helps to drive the third box above, creating differentiation and building business defenses: 1.4.2. OSTERWALDER, A. AND PIGNEUR, Y., O., (2010) “BUSINESS M ODEL GENERATION: A HANDBOOK FOR VISIONARIES , GAME CHANGERS, AND CHALLENGERS ” “A business model describes the rationale of how an organization creates, delivers, and captures value.” 11 The “Business Model Canvas” method is a simple framework that divided a Business Model into 9 blocks that drives all the effort required in a business development. 11
  • 12. Once the objective is to understand how to put Shenkar’s Model to work, the Canvas method helps to organize the observation process inherent into the copy process (benchmark, mapping, seeking information), what represents the visible part of a Business Model, and which blocks required a more cognitive work or a creative thinking process to understanding the intrinsically part and the Business regarding the goal to deliver the same value in another environment. 1.5. NARROWING THE DEFINITION: THE SUBJECT OF STUDY The purpose of this study is not to discuss the willingness around copying practices but to understand the process involved in a copy and its implications into business environment, further the emergence of the Internet Industry and the shrinkage of markets as consequences of globalization. Shenkar (2010) 12 underlined companies’ approach to copy: “Some firms copy a model as is, whereas others adapt it to their own circumstances or attempt to produce a marked improvement on the original. A few attempt to understand how borrowed model will fit in, but others are contented with replicating its most visible external feature.” On the goal of reproducing the same outputs just imitating a innovative pioneer, just a few companies understood that even when copying someone’s idea, to achieve consistent level of 12
  • 13. success to build endure copied-business, besides cognitive skills to decipher the model, it is mandatory to have skills for innovation. As mentioned before, this paper concentrates efforts in one particular copy-strategy described by Shenkar, which is “The Pioneer Importer” 13: “An important form of imitation involves the importation of a model from one environment to another, usually across borders. […] Although all imitators are subject to the correspondence problem, importers face a wider array of challenges because they transplant a model in another soil and must consider differences between the two environments”. The studied start-ups took advantages of the pioneer staying out of their target markets, establishing a leading position, but being aware of environment differences criticism they had hard work to put on track their ideas. 2. LATIN AMERICA LOCAL CONTEXT (INTERNET ON THE EMERGING MARKETS) 2.1. THE BEGINNING OF THE INTERNET INDUSTRY Back to 1969, when Vint Cerf and Bob Kahn developed the TCP/IP technology, no one was capable to forecast the impacts of this innovation at our lives or business systems. A new channel called Internet emerges creating unprecedented changes and enabling new opportunities to almost anyone. There was no prevailing company or competence in the first years, the game rules and deeper impacts remain unknown for a long time, may be it persists until today. The lack of regulation presented on the Internet environment and the skyrocketed adoption curve, enabled start-ups to take advantage of the new media while there were just nonconventional brands forming around the web. When the first entrants started to concentrate audience, the business model that submerged was a copycat of a well-established business model from other communication channel. The three-way market 14, which consists in a cycle among three entities: 1. Producer: the one that provide a content or a service free for customers, looking to hub a lot of eyeballs (called “Unique Visitors”); 2. Customer: the Internet user, who consume content and services for free, once that “seems” to be the nature of the Internet; 13
  • 14. 3. Advertiser: the one who pays for CPM (banners impression on a webpage); Inheriting this practice, while the network was acquiring new adopters and behavioral measurement technologies were under development, a new gold rush started. Who will be the main eyeballs hub? It was a very simple mathematical expression which sustain the earliest Startup Business Plan: Increasing numbers of eyeballs (translated into customer’s attention) + qualification profile (means segmentation) + measurable results = revenues. This was used for every kind of business that relies on views for success. The dot-com bubble’s burst in March of 2000, relied on the lack of confidence of investor on the Internet Business Model, proved that the simple copy of model from other channels failed that time. It is crucial to understand that it was not a consequence of underdeveloped potential or misunderstood of behavior, what really happened was that it was hard to sell advertising when less than 1% of your audience is clicking into a banner. The main issue here was the inability to turn “eyeballs” into revenue. The new infant industry had to face a lot of challengers until proving it was capable of produce profitability. Just a few months after that, on the opposite side of these controversy, companies like Amazon and Google emerged from the bubble’s burst enhancing their business model reaching revenues. For instance, Google launched their “AdWords platform” just in September of 2000 15 and until nowadays, this remains the product that generates most part of the company revenues. Instead of generating revenue, companies like Napster created disruptive changes in the music industry revenues providing a free exchange platform for music. Empowering end-users to share digital music files, the negative effect at the Music Industry Profitability attracted 14
  • 15. attention under the act of copyrights prosecution from the “offline” companies but even after closing doors on 2002, the heritage of the revolutionary software remains causing changes in other types of content (i.e. movies, books, etc.) based industries. The decentralized nature of the web innovates again in January of 2001 16 . Jimmy Wales proves (in its second try) that even unknown people could collaborate in order to produce content: the Wikipedia came alive and after that, “The Web2.0” concept, coined by O’Reilly, T.17 in 1999 reinforces customers’ power, that they can start creating, rating and sharing content. That was possible because the Internet cut costs of product, make feasible to unknown people collaborate together. In the same degree, each initiative on the early stages of the Internet was just copycatting old ideas and behaviors, adapting them to a new online community behavior and attracting more people’s attention. For instance, as described by Jenkins, H. (2006) 18 in his book, the Blogging Era was the adaptation of a used offline practice named “Fanzines” that consists in people, creating Fan-Magazines to discuss its personal (and segmented) interest, bypassing traditional media. The Internet Industry was maturing so in 2006 Anderson, C. 19 coined the theory of the long tail and driven by tools like Google that organize the uncountable amount of content dispersed on the network, making use of people’s production in simple and short tasks like tagging and rating built relevance to niches. The Recommendation Era takes place. Indeed, to get there, first the customers had to be familiar with the ideas and concept behind the new medium, the graphical evolution make it more user friendly which helps to boost its participation and generate the “momentum for change”. This is called as the “Network Effect or Network Externalities” of the Internet. Every new user on the Internet brings more value to the whole networks, interested on the interactive activities available in there, new people increases the Internet attractiveness which bring more people to joining the Industry. This effect was responsible to surpass the gap between the Innovators-First Adopters (who are, in majority academics) and then, the Early or Later Majority achieving what Gladwell, M. (2000) of “Tipping Point”20, when the level of interest increases so much that becomes unstoppable. Every Internet successful story achieved in different degrees its effect, that is why the idea behind the model, proves its viability and attractiveness so the company could generate the profitability required to sustain their growth. For instance that is what eBay’s and its copycats made by creating a marketplace where the demand and the offering started to push it other. 15
  • 16. 2.2. ROOM FOR O PPORTUNITY – DOES COMPANIES OMISSION THE REAL RESPONSIBLE TO CREATE ROOM FOR COPYCAT PRACTICES , WHY DID THIS SCENARIO EMERGE? Design an innovative business requires: time, money and a lot of effort to put on track the new idea. The company is trying to prove its concept, not only regarding customer’s interest but also economical feasibility, trying to gain scale and build defense barriers. Right after the business reach much attention, the company immediately needs to wrestle against local followers or even already established organizations that had their markets under attack. Even conscious that time to market is important, the company needs to focus on its local-primary market to develop and defeat its market share in order to reach financial results. Do this movement at the beginning requires a lot of resources while they need to prepare itself for scalability and cost efficiency. Each external initiative to enlarge focus could generate waste of resources that will make harder to defend the core market. According to Anthony, S. (2012)21 article, the emergence of a new trend is shifting the way innovation happens inside companies. One argument that perfectly fits into the issues analyzed by this study is “The increasing ease and decreasing cost of innovation mean that start-ups now face the same short-term pressures that have constrained innovation at large companies; as soon as a young company gets a whiff of success, it has to race against dozens of copycats”. He explains the hypercompetitive environment we are living, coupled with shortening development cycles are making harder than ever for start-ups to create enduring competitive advantage. Latin America has historical of political and economics instability, adding to this the lack of infrastructure and people’s qualification it is a lot of complexity to consider if the decision is to entry in those markets. At the period where the new Internet Industry was growing up, deep changes were happening in Latin America. The governments started to open its markets trying to ride the Globalization wagon. Latin Americans executives and entrepreneurs are used to those environments 22, a trial and error cultural tolerance emerged from that experience. To survive in a high unstable scenario they need to develop sharp abilities like mapping cause-effect and being flexible about plans once is no longer possible to follow long terms plans. Shenkar’s Theory considers execution and implementation capabilities essential to companies that are planning to imitate: “[Imitation] ... Must be weighed in terms of underlying context 16
  • 17. and capabilities [flexibility + creativity + execution] ... Establishing the balance between innovation and imitation is challenging, because this kind of balance is a moving target.” 23 “[...] Implementation benefits from the formation of interdisciplinary teams, each one bringing its own perspective into the mix.” 24 Shenkar (2010, p.134) The journalist Williams, A. 25 explains the current trend in Latin American’s Business of “[…] A growing pool of talent is emerging who are helping companies from South America and the rest of the world create a new generation of startups”, most of them, went abroad to study in leader business schools and brought back not just advanced management skills but also innovative business models to their homeland. The World’s Technical evolution is lowering some of the mains gaps between the countries and eliminating classical entry barriers to new comers, for instance the Cloud Computing ServicesVI and SaaSVII practices not only make it cheaper but give worldwide access to leading technologies, removing most part of the infrastructure issues in almost every part of the world. Shenkar points that explaining how less technological countries take advantage of developed ones: “New technologies are less expensive to maintain and easily combined with older technologies. Once a technology has been obtained, newcomers overcome entry barriers by leveraging low wage, lax regulation, a growing and protected domestic market, and a tendency of local authorities to turn a blind eye to intellectual property rights violation”. 26 3. CASE STUDY MERCADOLIBRE VS. EBAY Following the Shenkar’s Framework this chapter applied into MercadoLibre business development. 3.1. WHERE TO IMITATE – THE SELECTION OF INDUSTRY OR DOMAIN FROM WHICH TO DRAW THE IMITATION Back to 1999, Marcos Galperin and Hernan Kazah, founders of MercadoLibre (NASDAQ: MELI) were in US since 1997 having a MBA at Stanford. Immersed in the culture of Silicon Valley, Marcos and Hernan developed a passion for the Internet while attending business VI Cloud Computing is the practice of using a network of remote servers hosted on the Internet to store, manages, and process data, rather than a local server. VII SaaS (Software as a service) is a delivery model enable by Cloud Computing in which the software is typically hosted on remote Internet servers and accessed by users using a web browser. 17
  • 18. school. It was time for the Internet Golden Rush in US and they follow closely the rising of Internet industry during their studies. They watched the flood of almost 500 IPOs 27 of Internet related companies and became enthusiastic about the possibilities. 3.2. WHAT TO IMITATE – DEFINING THE OBJECT OF IMITATION: A PRODUCT , A PROCESS , OR AN ENTIRE BUSINESS MODEL But it is easy to understand that the object of imitation will be an entire business model due to the local industry was just beginning. Everything that they choose to imitate will be entirely new in Latin America’s Market. The concern here was to select the right model, the one that represents the less effort to introduce due to the challenge of surmount the correspondence problem. 3.3. WHO TO IMITATE – DEFINING THE ENTITY BEHIND THE MODEL Immersed in the Silicon Valley culture what Marcos and Hernan need to do is to choose the right model. Looking for the leaders at that time, it was available a broad spectrum of Business Models to choose from. Starting from the three-way market (based on advertising) model to e-commerce initiatives. EBay Inc. (NASDAQ: EBAY) was founded in 1995 in San Jose, CA and today is the world’s largest online marketplace, utilizing PayPal to ensure secure transactions. The company operates specialized marketplaces such as StubHub, the world’s largest ticket marketplace, and eBay Classifieds sites, which together have a presence in more than 1,000 cities around the world. 28 The story started as an academic game, the founders were trying to create a perfect market economy where individuals could freely trade each other then almost by accident they created the giant29. Two relevant points at eBay’s Business Model are (1) the fact that eBay bypass a huge issue about e-commerce at that time, which is deliver logistics (by the nature of business, who are responsible for that is the seller, not the company) and (2) when they went public on 1998 (for instance, at the time of Amazon’s IPO in 1997, the company presents around 19% of losses – approximately US$3 million) they were already profitable, which means that the model 18
  • 19. proved itself30. The innovative model, was based on an auction tool that enhances person-to-person ecommerce based on placement fee and a successful sale commission fee: In May 1999, Marcos obtained financing for the project, and together they launched MercadoLibre.com (NASDAQ: MELI), emphasizing local content and regional best practices to outperform its nine rivals in the market. 3.4. WHEN TO IMITATE – THE TIMING: CHOOSING THE RIGHT STRATEGY OF COPYING As said by Shenkar, they explore the asymmetry across markets and tried to expand to different countries as soon as possible. After opened the first office in Argentina in May of 1999, they expand business to Brazil 2 months later and until the end of 1999 had add Mexico to the list. At the end of 2000, they were established in Colombia, Chile, Spain, Uruguay, USA and Venezuela as well. But an important advantage for a pioneering copycat, which is to stay out of the target market of the pioneering (eBay in this case) didn’t work for MercadoLibre. The problem was that other imitators were playing the same game at the same time. Still in 1999, at least 3 other companies (equally copycats inspired in eBay success) were running the same business in Latin America: iBazar - an European Company with office in Brazil; Lokau – a Brazilian Company that operates also in Mexico; DeRemate – another Argentine Company also focusing on Latin America region 19
  • 20. In order to structure the business, they ran to define “How to imitate” and put effort in order to develop the market. 3.5. HOW TO IMITATE – THE FORM AND PROCESS OF IMITATION One advantage that MercadoLibre had at the time was the fact of being a start up. Shenkar describes in his book the core competences that one company need to have in order to copy an entire business model. Going from an open-minded value avoiding the negative connotation of imitation, from the mirroring skills. Even using the same core application over all countries (which means the same development effort easily scales from country to country) they start with a road map based only on the visible part of the eBay’s Business Model. Described below, using the business model canvas (what was visible from the model used by eBay at that time) we can see there is a lot of empty spaces in the model that requires a lot of cognitive work to solve: 3.6. THE CORRESPONDENCE PROBLEM Considering that Internet Industry had only 4 years old in US, the evolutionary stage outside its original country were very low. Each initiative to run that business in developing countries, prevailing situation at Latin America Countries, in general had to deal with huge constraints that were outcomes of “Closed Market Cultural” likes:  Infrastructure Capabilities: limitations on Information Technology Framework and Networks, a bunch of companies licensed to provide infrastructure, few competitors 20
  • 21. means low quality and high prices;  Qualified Human Resources: the Industry itself were suffering for non-experienced people in order to develop business, no one foresee how the market will work even in US, in addition to that, Latin America’s Countries still had scarcity of related professionals or even academics like Telecom Engineers/Software Developers/Marketing or Business Specialists, etc.;  Language: the languages spoken in Latin America are Spanish (around 60% of population) and Portuguese (around 34%). At that time, English-based web sites had limited attraction to these population creating a natural language barrier to foreign companies but remains difficult to overcome the linguist asymmetry when you are trying to create a Brand Name or make your concept well-know;  Economic and Political Differences: each Latin American Country was in a different level of economical or political stability. Understand the particularly cycle, handle investments and define prioritizations were a hard work. MercadoLibre, in particular had to deal with its own sort of constraints to develop locally the business like:  Local Buying Behaviors: a local assumption in Latin America was that e-commerce fit well in US because people were already used to buy for catalogs. Latin Americans were not addicted to that, which made people skeptical about the practical adoption of the system;  E-commerce reliability: At that time, a huge obstacle to overcome in Latin America Market was not safety, but the lack of trust. Everyone who was running e-commerce business needed to overcome buyers’ unsafe feeling. Overcome the resistance to put credit card numbers into a website once people feared frauds everywhere in the medium (Internet);  Internet Usage: At that time, in Latin America the Internet Industry was just crawling. Argentina had 7% (2.5 million) of Internet population reach at that time followed in Latin America for Brazil with just 3% (5 million) and Chile with 16% (1.7 million), while in the US already counts for 44% (124 million) 31.  Feedback Systems implementation: it was a capital correspondence problem to solve, for the company success was in building anti-fraud systems that could mitigate that risk caused by the nature of being a C2C marketplace. MercadoLibre needed to solve the contradiction of avoided complex logistic system management, a key activity to 21
  • 22. other e-commerce companies that must manage inventories and delivering systems to overcome the cognitive dissonance barrier inside buyer’s mind that was receiving the right product at his/her house (it was considered not only time to receive but also the seller quality promised);  Key Partnership: Commission Junction was an important partner to eBay to spread its business capillary over the Internet. As an important Marketing tool, it drove eBay’s products and brand across other web sites (vertical communities or site contents) with a rational cost rate. In Latin America, not only the Web Master’s communities were tiny, but there was no hub business that could help them to achieve the correspondence;  Small and medium seller business awareness of Internet benefits: persuade local sellers to invest time and resources into the business, given the promise that they were building for them a profitable sale’s channel. To build value, adapt and execute the Copied Business Model, MercadoLibre faced hard challenges, not just investing energy at cognitive and thinking work but also creating an entrepreneurship internal culture. Once there was not experienced person on Internet Industry, MercadoLibre searched for people who have entrepreneurship skills that could motivate a trial and error learning process, necessary to the early initiatives related to business development and E-Commerce. The more people who had the ability to observe the environment and create hypothesis, adapt ideas, test it, learn from the experience and change the business overcoming the knowledge constraint. According to the COO of MercadoLibre, Stelleo Tolda 32,there were no prevalent country responsible for success achievement, actually acting in several countries with different economic, political and cultural environments, which helped MercadoLibre not only mitigating risks but also building complex and enhanced professional networks, using workshops and internal seminaries across the company. Another capital competence developed inside the company was data analysis. The all-able-tomeasure characteristic of the Internet, made feasible not only to create and test a sort of assumptions and hypothesis, but also to discover what really works at this new industry. Looking to internal data makes possible trend detection, new assumptions and further tests and theories to solve essential problems. The scenario also propitiates the triumph over other key activities to run the business, Fraud and Costs. Collection of enough data across different regions, they could define an average 22
  • 23. conversion-rate benchmark, no matter if the subject was sales transactions, customer registration into the web site or customer acquisition costs, it helps to drive strategically decisions and control financial resources. To overcome cultural barriers, MercadoLibre started its own “University course”, performing seller’s meetings where they could teach not only how to increase attractiveness of their products inside the company’s marketplace but also some business competences like customer relationship, inventory management and sales techniques. It was time to improve demand for MercadoLibre’s sellers and due to internal cost policies the company was not able to invest in marketing for customers acquisition (buyers) at the current advertising model: CPM (cost per mille attention). The early conversion rates for the first trials discourage the company to follow this road. The opposite of US market happens in Latin America, where a leading company called CJ.com33 (Commission Junction) was spreading the concept of Affiliate Marketing VIII, but there was not a similar service running here. The Webmaster communities did not exist and the only option presented was to build internally the necessary expertise to start the capillarity system that would provide the costly efficiency demanded for business so, they built their own, called MercadoSocios. MercadoLibre had to develop competencies and complementary business to achieve the same output of eBay, for instance, to drive the issue of customer acquisition costs, possible through a partner Commission Junction that was absent in Latin America they developed its own solution – MercadoSocios – to retain the same output. The same happens to PayPal, bought by eBay and responsible for the increasing safety and accountability in online transactions, MercadoLibre has to develop internally a similar solution, called MercadoPago to preserve the favorable output. Below, how MercadoLibre’s Business Model Canvas was created in its 14 years of business development: VIII 1. 2. 3. Affiliate Marketing at is very core is about relationship between three parties: Advertiser, who are ready to pay other people that helped to sell or promote their business; Publisher, who is an individual or company that promotes advertiser’s product or service in exchange for earning commission; Consumer, who is actually the one’s who sees the Ad and then makes an action (either by clicking, submitting registration or buying products or services) 23
  • 24. 3.7. IMOVATION CONCEPT: FUSING INNOVATION AND IMITATION Shenkar values the Imovators benefits of its framework: “Imovators understand that imitation is not contradictory to, but rather supportive of, innovation34. […] Innovators must focus their efforts on a few core features, and even then they may produce a novel and creative recombination of imitated and innovative elements. […] It is a fusion we have called Imovation, and it is already practiced though not yet perfected, by companies ranging from IBM to Apple35.” As explained by Schwartz, E. in his book36, it is more common to find more similarities than differences applying biological theories into business. The Darwin’s theory of mutation and adaptation of species work form business too. When copying someone else idea or business, due to the not visible part of the business or the trials to solve the correspondence problem, little parties of the copy could intentionally change if you were looking for differentiation, or caused by fortuity, accidentally changing some of the characteristics by misunderstanding the model. Growing in a already competitive environment, where there were other three players (iBazar, Deremate and Lokau) MercadoLibre deliberately choose a little chance in eBay’s Business Model: not to charge a placement fee, which could scare new sellers to come and try the company system. They are not the only one. Deremate and Lokau follow the same road and just Ibazar (the European Company with a branch only in Brazil) made a more aggressive change: putting the 24
  • 25. service for free, trying to apply the three way market business model. This differences, made in Brazil Ibazar the leading company (in audience measurements) but also, the one who presents most ratio of claims related to fraud. MercadoLibre knows that somehow, the revenue streams will come from placements fee. They were just charging for sale’s commission what was hard to produce considerable revenues. The feedback system (Seller’s Reputation) was crucial to guarantee this revenue stream. At that time there was a few of people talking about crowd participation (web 2.0 standard flag), eBay, MercadoLibre and Deremate are already using the wisdom of crowds to put its business model to work. To overcome the cognitive dissonance of being a trustful seller, the sellers of those companies were motivated by rating the transaction positively, which means not just close deals with buyers inside the platform but also inviting the buyer to write a positive that feedback for their own. MercadoLibre created the MercadoLíderes Group, the Top Sellers who bear stars that shows they are trustful and offering exclusive visibility (partners placement of products) in return. But MercadoLibre (and eBay and Deremate and Lokau) still had this business based in an auction online tool, which provides just one unit of product to be sale per time. Trying to improve revenues and ratio of sales, MercadoLibre introduced some changes expecting to increase revenues and test acceptance of placement fees – what they called “Reserved Price”. Some time thereafter, trying to shorten auction period and improve its sales volume they launch the “Immediate sale”. How it worked:  Traditional Auction System: the seller set a period (number of days) for the auction and the initial bid value, at the end of the period he is forced to sell the item for the ending price – the cost involved was only the successful sale commission;  Reserved Price Auction System: the seller set a period (number of days) for the auction, the initial bid value and the reserved price value, at the end of the period if the bid value don’t achieve or surpass the reserved price value he is not forced to sell the item – to use this method, if the reserved price value isn’t achieved he pays a fee and if it is achieved pays only the successful sale commission;  Immediate Sale Auction System: the seller set a period (number of days) for the auction, the initial bid value and the immediate sale price, when the bid value is equal to the immediate sale price the auction ends – to use this method, the seller pay a placement fee plus successful sale commission; 25
  • 26. What came next was the accidental innovation that created value to MercadoLibre and skyrocket sales ratio. They launched a sale method called Fixed Price that enables Sellers to sell several units in the same listings. Tolda, S.37 explains that eBay already had this insight, but remains resistant based on the traditional auction model created by the company. Looking into internal data, MercadoLibre realized that its customer sellers were adopting an unpredicted behavior. They were using the Immediate Sale method but setting up the same value to the initial bid and immediate sale price 38, which gives birth for the “Buy it now” method, before eBay, the Pioneer of the market. In February 21, 2001 eBay acquires iBazar S.A trying to solidify its position in Europe and significantly strengthen eBay’s global marketplace39. Ibazar had already operations in Brazil, a secondary market to eBay’s at that time. In September 2001, eBay and MercadoLibre closed a Strategic Alliance Agreement wherein eBay’s purchased of Series E-l Preferred Stock and Series E-2 Preferred Stock of MercadoLibre, and sold iBazar Com LTDA (Brazilian subsidiary) to MercadoLibre. They also established a strategic relationship in which eBay promoted MercadoLibre on eBay's web site and eBay assisted MercadoLibre in developing its operations in Latin America.” 40 In January 2002IX MercadoLibre assumed operations of iBazar (Brazil) and started close meetings to exchange experience with eBay’s employees. So, MercadoLibre a former Copycat of eBay now has access to inside information to follow its development in Latin America. As described by Tolda, S.41, at that time MercadoLibre was already a sustainable company (generated revenues to support its operations) but were pursuing profitability in order to advance strategically. The capital advice, gave by eBay to MercadoLibre was to maintain investments in business development and do not concern profitability. They show to MercadoLibre’s executives that the company was doing an astonishing work regarding customer’s acquisition (the average cost was lower than any country where eBay was operating) and that the Internet penetration rate at that time, stills very low. If they make the right investments and maintain the cost controls, naturally they will achieve profitability when the market expands. MercadoLibre follow the advice, restructured their internal systems, review its software and company architecture and when the market expanded they collect the earnings. IX According to Registro.br, website that monitor Domains Properties in Brazil, MercadoLibre assumed the domain property in January 16, 2002. More on https://registro.br/cgi-bin/whois/?qr=ibazar.com.br 26
  • 27. The following years for MercadoLibre started to consolidate its leading position acquiring Lokau in November 2002, 8 of DeRemate’s operations (including Brazil) in November 2005 and the last ones (Argentina, Chile, Colombia and Mexico) in August 2008. In 2008, two years after expired the strategic alliance between eBay and MercadoLibre, MercadoLibre launched its IPO. 3.8. OUTSTANDING PERFORMANCE Today, MercadoLibre is positioning itself as an IT E-commerce Service Provider42 and is the leading online marketplace for Spanish speakers. While most of its competitors have gone out of business, MercadoLibre continues to thrive. The company expanded to 9 countries in the Americas and Europe, and in 2002, eBay bought a stake in the company, making MercadoLibre its official partner in Latin America. In the summer of 2007, the company went public on the NASDAQ with a US$400m IPO, Endeavor’s first US IPO. In 2011, MercadoLibre’s market cap reached US$3 billion. The site has over 50 million registered users. 43 4. CASE STUDY: PEIXE URBANO VS. GROUPON To explore other points of Shenkar’s theory, this study analyzed another well-known case of Copycat, not only in Latin America, but in a Global Market basis: Groupon, the faster growing company in history (the business that reaches 1 billion dollars sale quickest) and probably the most copied idea as well. The concept born on previous community based web site launched in 2007 called The Point. The web site lets people start a campaign asking people to give money or do something as a group. By delaying action until enough people come together to have a real impact, The Point helps consumers, employees, citizens, activists, parents — or anyone — come together and solve problems that they couldn't solve alone 44. In November 2008, as an evolution of The Point, its owners built a daily-deal-bases web site that uses the same mechanics under the name of Groupon. If a certain number of people sign up for the offer, then the deal becomes available to all, if the predetermined minimum is not met, no one gets the deal that day. This reduces risk for retailers, who can treat the coupons as quantity discounts as well as sales promotion tools. Based on scarcity and impulsiveness, the 27
  • 28. service clashed the social networks and becomes almost immediately a success. Groupon turned down a Google’s acquisition proposition of 6 billion dollars 45 in October 2010. Groupon faced several copies following its launch that fits in the strategically timing theory of Shenkar’s Model. Going from the Fast Second to the Pioneer Importer throughout the Come from Behind. The focus here is to understand the competition implications of being a Pioneer Importer (meaning, importing the idea to a new Market) in a context where the next round of imitators eroded the benefit. 4.1. COPY CONTEXT: THE ACCELERATING PACE OF IMITATION Took from the other studied case, MercadoLibre vs. eBay, from eBay’s launch in 1995 and its Latin Americans Copycats in 1999, 4 years had passed. Groupon was found in November 2008 and Peixe Urbano, the first copycat in Latin America’s Market was launched in January 2010, a little more than 1 year after the original. At this time, Groupon was entering into the European Market but they decided to copycat its own copycat Peixe Urbano in Brazilian market prior to exploring their normal brand in the country46 using another brand called Clube Urbano. After they understood the correspondence problems that they would have to face to explore the market, they finally launch the service using the regular Brand in 2011: Groupon. This occurs because of several changes that happen in the Internet Industry during the 10 years gap observed between the cases. The early Infrastructure constraints are not just solved but with costs failing down due to the current global access to cloud computing. Ten years late, it is easy to find professionals already experienced in the Internet Industry and familiar with technical and related skills and concepts of e-commerce. Besides that, Latin America reached on average 40% of population usage of Internet what leverage business scale. Not to mention that the Social Trend, drawn by Facebook and other social web sites success, became known to almost everyone the Internet capabilities. 4.2. COPYCATS PROLIFERATION: ERODING THE BENEFITS In Brazil, just 5 months after Peixe Urbano launched it accounts more than 10 other copycats running similar business and by the end of 2011 it counts almost 1,00047. The capital correspondence problem faced by Peixe Urbano, was the hyper-local dependence 28
  • 29. of the business model nature that creates the opportunity to other copycats entry into the business and erodes the benefits. [When] “The Fast second enters on the heels of the pioneer before the latter has had an opportunity to establish a solid monopoly and before other imitators - sometimes called "rabbits" to denote the speed at which they multiply - erode the benefits.”48 As an indicator of the business reputation shutting down, in November 2012 PROCON X released a list of 200 collective sales XI not recommended web sites for consumers to trade with. Nowadays Groupon drives more traffic than Peixe Urbano but the model denotes to be fatigued after much adaptation and different applications overs the last years. See the traffic data available about the last 6 months on Alexa‘s Web Site XII. Source: http://www.alexa.com/siteinfo/groupon.com.br 4.3. COPYCAT EVOLUTION: TRYING TO IMOVATE After opening operations in other Latin America countries like Argentina, Chile, and Mexico Peixe Urbano bought 49 in March 2012 Groupalia, another Latin America Copycat of Groupon and consolidated its leading position at the local commerce market. X PROCON plays in Brazil the same role as consumer defense organization as the Federal Trade Commission in the US. XI Local denomination of Brazilian’s web sites which follows Groupon business model. XII Alexa is the Web Information Company. Since our founding in 1996 we've been committed to providing free website analytics for all websites. Today, millions of people from across the globe visit Alexa.com each month to access our web analytics and other services. 29
  • 30. Pursuing the maintenance of its business, the company continues to develop its business based on the main assets conquered the relationship with local merchants. They made other acquisitions to add the company’s portfolio other services like online reservations 50 and food delivery solution51 searching for new revenues stream. 5. CASE STUDY: COMPANIES DRAWN FOR COPIES? 5.1. SAMWER BROTHER’S AND THE ROCKET INTERNET. Rocket Internet is a German startup incubator focused on transaction-based markets in online and mobile environments. The founders, three German brothers named Alexander, Oliver and Marc, known as the Samwer Brother’s, began its operations back in 1999 but since 2007, under the name of Rocket Internet has been building copycats online business in developed and emerging markets. Nowadays, they count for more than 100 businesses in more than 40 countries52. In 1999, the Samwer Brother’s took the same steps as Marcos Galperin and Hernan Kazah did in the Latin America at that same year. They cloned eBay’s business model in German under the brand of Alando and just four months after the launch, eBay paid US$53 million to acquire it. The transaction made the Samwer Brother’s the first Internet millionaires in Germany. The declared but unpopular Copycat Strategy applied by the company, made their brand frequently mentioned in international sites and online or startup specialized media53 and definitely puts Berlin’s startup scene on the international business map. The company built an internal culture that promotes entrepreneurship behaviors that meet the list of competences required into Shenkar’s framework for copy companies. For instance, see how the Rocket’s web site describes the company’s culture: “We are passionate entrepreneurs and focus on performance. We remain humble, and we understand that success is a result of hard work. We want to learn every day and share our knowledge with each other. We focus on the details and always try to solve problems ourselves. We want to be selfless and pragmatic and have no time for politics. We value intelligence more than experience. We believe that anything is possible. We move as fast as we can and take risks. We like to get and give autonomy and responsibility. We are flexible and tolerant towards ambiguity and uncertainty. And above all: we are always looking for great people.” 54 In the next sections, the study applied Shenkar’s Framework to analyze the company 30
  • 31. evolution. 5.2. WHERE, WHAT AND WHO TO IMITATE Rocket Internet focuses on online industry, defining clearly the method applied in order to decide the domain of its activities: The object of imitation: “Our primary focus is on building proven, transaction-based business models in the online and mobile space. We are however not limited by such parameters and seize other attractive opportunities whenever they arise. 55” 5.3. WHEN TO IMITATE Rocket Internet applies the Pioneer Importer Strategy, identifying successful Internet ideas usually from the US, and replicating them in several countries distributed in all continents: Africa, Asia, Australia, Europe, North and South America. This strategy enabled the company to explore the option of selected exit from a bunch of its copies. Selling their own copycats initiatives to the original company or other players still adding value, not to mention cash into the company’s portfolio XIII. For instance, the Samwer Brother’s sold the Alando website, the Germane eBay clone, to eBay just four months after its launch and the CityDeal website, a European Groupon clone built by Rocket Internet and sold to Groupon in May 2010 56. Those two selected examples reinforce not just their capacity to create successful copies but also the plan to sold it for the original one, what instead of making the company weaker, helps to extend its reputation and either helped eBay and Groupon to start its own international expansion. In the case of Groupon acquisition, they decided to hire the two older Samwer Brother’s as consultants to guide them in its international expansion plan 57. 5.4. HOW TO IMITATE Consciously decided to be a Pioneer Importer and never an “Innovative Company”, the brothers explored the asymmetry between markets to develop its business empire. Rocket Internet needed to build up internal competences to make it possible before they XIII To see a complete list of Selected Exit Business of Rocket Internet, visit its own Web Site at the page http://www.rocket-internet.de/ventures 31
  • 32. spread its business globally. Aiming it, the Samwer Brother’s put emphasis on executing capabilities into the business development process, as said by Groupon CEO Andrew Mason (2012) in a interview: “What people have to realize is the idea is the easy part, and that execution is the hard part, and Marc and Oli are the best operators I’ve ever seen in my life” 58. The same steps followed by MercadoLibre to create an internal capacity to adapt business requirements and overcome the correspondence problem in distinctive countries at the same time, Rocket Internet played the same game, developing a complex and intrinsic professional network to drive its decisions and exchange its own best practices across its companies and across boundaries. After spending some time playing this role in so different regions, they accumulated a deep understanding about technology adoption cycles and local culture differences, what makes them capable of creating its own recipient’s to drive in global scale the correspondence problem. They have learned where to put substitute elements in the imitated model and where to find local or global partners to fit the model and the environment. Adding to that knowledge, an internal adjusted framework to replicate and adapt key activities required to build up digital-based businesses, Rocket Internet made possible to create a startup assembly line, cutting costs and time in each new business they plan to launch. Another capital output of this approach is the complementariness effect over future initiatives, not only leveraging results based on the previews outcomes, including built sectorial relationships, vendor’s network or revenue streams, but also helping to generate bargaining barriers to other copycats or blocking the original company to entry in its regional markets. The value projected from this behavior is the proved shortcut-knowledge to achieve financial results in a new business or market. Minimizing failures and reducing risks involved from the conception of a business until its productive stage, cutting researching and development costs, it is possible for them to better manage their key resources and support a variety of simultaneous initiatives across boundaries. They also put pressure under innovative startups, once they quickly copy a good idea into other markets, conquering and retaining value being the first what leaves them the opportunity to sell the business to the original or proceed to collect profits itself. According to a news published by Bloomberg Businessweek at the end of 2012, the companies founded by the Samwer Brothers worth around US$1 billion59. 32
  • 33. 6. CONCLUSION 6.1. INSIGHTS TO SHENKAR’S FRAMEWORK EXECUTION Evaluating the Shenkar’s Model and comparing it to Traditional Business Strategies Theories, it is possible to realize the same degree of correlation between the decisions and the requirement in order to develop a business plan. Observation denotes that the culture required in order to create the environment for copy, often relies on entrepreneurship competences presented in startups. The experimental environment facilitates the copycat strategy in startups rather than the appliance of the same model in existing companies. Indeed, the capital weakness inside existing companies to apply the model is the disruption caused by controversial competences to drive the current model and the cloned one. Once they try to match the pieces, the dynamic differences between the models clash against each other generally making the company lose track of core competences. Execution abilities, shown up frequently as an essential contributor to the success of the clone initiatives studied in this paper. According to Black, S. (2013)60 the adoption of a Lean Startup Process, a method that “[…] favors experimentation over elaborate planning, customer feedback over intuition, and iterative design over traditional ‘big design up front’ development”. The prior statement meets the advices given by Tolda, S., COO of MercadoLibre (2013)61 in its interview. Based on the lack of disciplines or subjects in Business Schools that teach those competences, there are other subjects on more traditional disciplines that could be applied to facilitate the analysis. To find more direct correspondences, see the table.1. 33
  • 34. Note that the model doesn’t differ too much from a traditional Business Plan. Actually, it demands the same degree of cognitive effort required to build a business related to innovation. What the framework really adds to this journey are the right questions to solve the common challenges. To select the right model or just a fraction of it, it is required to determine the same basis that in a regular business: a mission statement. The strategic decision related to timing, the “When to imitate question”, requires a deep understand about potential entrants (monitoring other copycats) or the original company intent to entry in the same market region (for pioneer importer strategy) evaluations, presented in Porter’s theory. The decision of using a “The Fast Second” strategy or to be “The Comer from Behind” enables the use of McCarthy’s Marketing Mix Strategy to set the positioning or differentiation based on the Marketing Mix. To overcome the Correspondence Problem, its essential to make an external environment analysis to run the “Pioneer Importer” and find out the differences related to regulations, 34
  • 35. cultural behaviors, technology adoption or development level, etc., to adapt the model. The Business Model Canvas helps to define the internal set of competences of a company in a simple framework whether to clone an entire business or just a part of it. It will be easy to find the controversies when the pieces are together, trying to create the puzzle, which means the entire business system. This is the Business Model Canvas, with the selected subjects most influenced by the “Correspondence problem into a Pioneer Importer Strategy”: To “Imovate” or create value, a crucial part of the copying model regarding the innovation from the inspired model, use techniques like the “Blue Ocean”, The Marketing Mix analysis or the Competition Strategy of Porter’s. Besides that, trying to accelerate the erection of barriers to defeat a business, it is possible to take into account Porter’s evaluation or make a Risk Assessment, to found the most sensitive activities of your model and creating a plan to mitigate it. 6.2. FINAL CONSIDERATIONS Shenkar’s Framework helps to prove that Copycat initiatives could create value, innovate to differentiate the business and build barriers to defeat the business. The framework also helps to plan a copy, from the selection of a copy domain to drive the correspondent problem, the invisible part of the business system. In his book, Shenkar (2010) writes its conclusions appointing that: “Having observed Market reaction, imitators can better calibrate a product, positioning it where returns appear more secure and promising, […] lowering cost and shortening time to market 62. […] New entrants from emerging markets rely heavily on imitation to compensate for their lack of capital and know-how, and cost saving they reap - by skipping R&D while adopting preexisting but new35
  • 36. to-market or new-to-the-firm technologies - is crucial to their competitive advantage 63. [...] Successful firms are chosen not only on the assumption that following them will produce better results but also as a way to obtain a measure of legitimacy, something that is especially important during times of high uncertainty64.” It’s important to notice that the use of copycat strategy could reduce risks but it’s not enough to build companies to last. MercadoLibre was required to deal not only with the institutional voids in Latin America, but also with missing parts of the business environment. The absence of Commission Junction and PayPal in Latin Markets create additional demand to the Argentine’s entrepreneurs, at least they had much more time to defeat its local position before the pioneer express any intention to entry into the region. Compared with Peixe Urbano’s case, that had short time to develop its business before entered in dispute, yet in the early stages, not only with Groupon, but also against a wide range of local copycats. Rocket Internet, on the contrary, took advantage of its position in a more mature market. Just 5 months after the launch of their first copycat in German, the acquisition made by the same pioneer imitated by MercadoLibre, eBay, they realized the potential of the copying as a business strategy and start to develop international skills (knowledge about foreign markets) so they just copy another business and copy its own business across the globe. The difference among the perspective of how pioneers saw Latin America’s market comparing to the European’s market dramatically changed after the world’s financial crisis. Not only the requirement of find other options, but also the evolution over the tech –industry of the region, alter the pace. The stability lived inside this countries reduce the institutional voids and diminish uncertainty and fear, for the pioneer’s expansion to those markets. Disregarding the invisible part of the Business Model, that add to the copycat applicant the complexity to analyze and discover, the secrets of success of the pioneer company, both need to deal with the correspondence problem, either considering institutional voids or missing parts of the environment, in order to implement the business into those emerging markets. The difference remains on the local knowledge and at the execution capability of both, to define which one will win the adventure of opening business. 36
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  • 40. 20 Gladwell, M. (2000) O Ponto da Virada: Como Pequenas Coisas Podem Fazer uma Grande Diferença [in Portuguese] [The Tipping Point]. Translated by Talita Macedo Rodrigues. Ed.: Sextante, 2009. 21 Anthony, S. (2012) “The New Corporate Garage”, Harvard Business Review (September 2012 edition): pp.44-53 22 Guillén, M. and Garcia-Canal, E. (2012) “Execution as Strategy: How Emerging-Market Multinational Thrive Amid Turbulence”, Harvard Business Review (October 2012 edition): pp.103-107 23 Shenkar, O., (2010) Copycats: How Smart Companies Use Imitation to Gain Strategic Edge, Harvard Business Press: p. 13 24 IBIDEM p.134 25 Williams, A., (2012) The Rise Of The TechnoLatinas: A Full-Fledged Startup Movement Emerges In South America, Available at: http://techcrunch.com/2012/09/16/the-rise-of-the-tecnolatinas-a-fullfledged-startup-movement-emerges-in-south-america/ (Accessed: 9 March 2013) 26 Shenkar, O., (2010) Copycats: How Smart Companies Use Imitation to Gain Strategic Edge, Harvard Business Press: p. 46 27 American Association of Individual Investors Web Site, On the Internet, Available at: http://www.aaii.com/computerized-investing/article/on-the-internet-web-sites-for-ipos (Accessed: May 2013) 28 TechCrunch WebSite, Companies profile: eBay, Available at: http://www.crunchbase.com/company/ebay (Accessed: March 2013) 29 Berkun, S., (2010) The Myths of Innovation, O'Reilly: p.6. 30 CNET Web Site, eBay roars into public trading, Available at: http://news.cnet.com/eBay-roarsinto-public-trading/2100-1001_3-215908.html (Accessed: May 2013) Los Angeles Times Web Site, Ebay’s Share Price More Than Doubles Since IPO, Available at: http://articles.latimes.com/1998/sep/25/business/fi-26408 (Accessed: May 2013) 31 International Telecommunication Union Web Site, Global ICT Developments: Time Series by Country, Available at: http://www.itu.int/en/ITU-D/Statistics/Pages/stat/default.aspx (Accessed: May 2013) Internet World Stats Web Site, Data Directories, Available at: http://www.internetworldstats.com/ (Accessed: May 2013) 32 Tolda, S., COO of MercadoLibre, (2013) Interview with author, May 10. 33 Commission Junction Web Site, What is Affiliate Marketing? Available at: http://www.cj.com/what-is-affiliate-marketing (Accessed: May 2003) 34 Shenkar, O., (2010) Copycats: How Smart Companies Use Imitation to Gain Strategic Edge, Harvard Business Press: p.15 35 36 IBIDEM p.182 Schwartz, E. “Darwinismo Digital” (Portuguese edition, translated by Bahr, R.) – 1st Edition – 40
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