Cosan has exploited its ability to adapt to the institutional voids in the factor markets of Brazil to emerge as one of the world’s leading sugar and ethanol producers. The Brazilian government had closely regulated prices, production, and purchase of sugar and ethanol, but after deregulation in the 1990s, the industry took off, enabling companies such as Cosan to exploit the country’s inherent advantages in sugar and ethanol production conferred by its climate and soil.
Cosan emerged from a competitive landscape in Brazil dominated by small and inefficient family-run businesses, particularly in the 1980s before deregulation. The company had grown in the fragmented sugar and ethanol sectors, mostly through acquisitions—particularly after deregulation—increasing its production efficiency through economies of scale. With a 9% share of Brazil’s sugar market and 7% of its ethanol market, Cosan was the country’s largest producer of both as of June 2009.
In 2007, Cosan raised more than $1 billion in an initial public offering (IPO) on the New York Stock Exchange, the first Brazilian biofuel firm to do so. The company planned to use the proceeds of the public offering to continue expanding through acquisitions and some greenfield projects.
More recently, foreign-based multinationals have been eager to tap into the opportunities of Brazil’s growing biofuel sector. The attractiveness of the sector to large multinationals compelled Cosan to restructure its corporate organization to prevent an unwanted takeover, enabling founder Rubens Ometto Silveira Mello to maintain control of the company. Cosan saw some benefits from the entry of large multinationals in consolidating the sector.
Operational know-how and a willingness to invest in systems surrounding its production facilities were critical for Cosan to differentiate itself from its local and incoming foreign competition. “We manage the society around the mill, which is key,” said one company executive. “We are an agricultural business. We plant, we fertilize, we raise cane, we cut cane, we operate the plants, we do everything. These major agribusinesses, they don’t do agriculture. They buy and sell supplies.” Most of the institutional voids in Cosan’s business remain upstream, so these capabilities have been persistent sources of competitive advantage vis-à-vis foreign agribusiness giants and oil companies targeting the biofuel market.
Cosan saw its investments in agricultural research and its use of technology to manage operations as other key sources of competitive advantage. Through sophisticated monitoring of crops, production, and soil quality and process improvements such as in sugar cane washing, Cosan sought to maximize the efficiency of its operations. The company was able to bring these efficiency gains to the mills it acquired. Cosan increased production capacity at Da Barra from 79 tonnes of sugar cane at the time of acquisition in August 2002 to 894 tonnes in 2008–09. Cosan’s expertise at managing acquisitions —developed amid myriad institutional voids immediately after deregulation—have remained a key source of competitive advantage for the company.
A large share of sugar cane production in Brazil relied on contracted labour to cut the sugar cane by hand. Working conditions for these labourers had been a frequent source of criticism. In 2007, Cosan became the largest producer—and among the first—to agree to eliminate outsourced labour in response to these concerns.
In addition to acquisitions, Cosan pursued brownfield projects in the productive but competitively crowded São Paulo region, and greenfield developments inland.
Some 85% of Brazil’s ethanol production was sold through five distributors, giving these firms strong bargaining power. Ethanol producers also bore the costs of transporting fuel from their facilities to distribution centres and then back to retail chains for final distribution. As a result, Cosan sought to become the country’s first integrated ethanol company. Cosan bought a chain of 1,500 Esso filling stations from Exxon in 2008, making it the first major producer to move into retail distribution. “We wanted to secure our access to consumers, and this deal gave us the necessary scale,” said one company executive.
The deal came as many major oil companies sought to move upstream into biofuel production. Cosan saw its local knowledge and experience as key competitive advantages vis-à-vis incoming foreign multinationals. Its growth and development in Brazil illustrate how emerging market-based companies can exploit their ability to navigate factor markets to build competitive advantage against both local and foreign competition.
Prospective emerging giants often face the question of whether to collaborate with multinationals or to compete against them alone. Bharti Airtel of India and Turkey’s Dogus¸Group pursued collaborations with foreign firms at different stages of their corporate histories. Their foreign partners provided capital, operational capabilities, strategic advice and valuable connections to other global resources. The two companies sought partners that would also improve and signal the credibility of their organizations.
Reprinted with permission of Harvard Business Press. Edited and excerpted from Winning in Emerging Markets: A Road Map for Strategy and Execution. ©2010 Harvard Business Publishing.All rights reserved.
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