short answers 200 words each

Globalization Case Series Pankaj Ghemawat

Cop yrigh t © 2013 Pan kaj Gh em aw at. Th is m aterial sh ou ld n ot be cited or circu lated w ith ou t th e au th or ’s w ritten

p erm ission.

Taking Totto Global

In 2013, N alsan i sold Totto backp acks, accessories an d cloth in g th rou gh 480 stores, of w h ich on e-

h alf w ere located in Colom bia an d on e-h alf in 21 oth er cou n tr ies. Th e com p an y, w h ich w as p riv ately

h eld , d irectly or in d irectly created jobs for 3,000 p eop le in Asia, w h ere m ost of its p rod u ction w as located ,

an d 7,000 p eop le in Latin Am erica, w h ere m ost of its m ajor m arkets w ere. By 2017, it aim ed to h ave 650

stores in 30 cou n tries an d to becom e a globally recogn ized br an d . Exh ibits 1 an d 2 con tain , resp ectively,

im ages of th e com p an y’s fou n d er, Yon atan Bu rsztyn an d of on e of its Totto stores. Exh ibit 3 su p p lies d ata

on th e evolu tion of Totto’s stores, an d Exh ibit 4 su m m arizes th e ord er in w h ich it h ad en tered foreign

m ar kets. Th e rest of th is sh ort case p r ovid es a h istorical ch r on ology.

N alsan i, a con caten ation of th e n am es of th ree br oth ers (N atan -Alberto-Sam y), d ated back to

Decem ber 1987 w h en Yon atan (N atan ) Bu rsztyn , aged 28, d ecid ed to bu y a leath er good s factory in

Colom bia. An in d u strial en gin eer by train in g an d th e you n gest of five broth ers, h e h ad gon e from fam ily

com p an y to fam ily com p an y, bu t h ad qu ickly realized th at h e w ou ld n ’t be able to ru n an y of th em . After

h u n tin g for several m on th s for som eth in g in m an u factu rin g, h e fou n d a ban kru p t leath er good s factory

w ith abou t 40 em p loyees w h ose ow n er w as w illin g to ren t th e p lan t to h im for a year, w ith an op tion to

p u rch ase, an d to gu ar an tee a certain volu m e p u rch ases over th e n ext few years.

Bu rsztyn qu ickly realized , h ow ever, th at it w as risky to d ep en d on a sin gle bu yer an d began

lookin g for n ew ou tlets for h is p rod u ction cap acity. Wh ile h e or igin ally focu sed on leath er good s, visits

to fash ion sh ow s arou n d th e w orld , p articu larly th e 1988 Mip el Fair in Milan , in sp ired h im to create a lin e

of backp acks in n ylon th at w ou ld in tegr ate color, d esign an d fu n ction ality —ev en th ou gh th at requ ired

d ifferen t m ach in es. By th e en d of th e year, N alsan i h ad started sou rcin g fabric from Ch in a to byp ass th e

lim ited n u m ber of colors—n ylon w as av ailable on ly in black, gray an d p in k in Colom bia —an d h igh costs

locally. An d sin ce a p reviou s job rep resen tin g IBM h ad con vin ced th e fou n d er of th e v alu e of br an d in g,

h e also looked for a bran d n am e th at h e w ou ld be sh ort, easy to p r on ou n ce in m u ltip le lan gu ages an d

easy to rem em ber. Sin ce h e p articu larly liked th e son g “África” by th e N or th Am erican p op gr ou p Toto,

h e lit u p on th e bran d n am e Totto.

Totto backp acks an d oth er p rod u cts w ere in itially on ly d istribu ted to ch ain stores, bu t m ost of th e

p rod u ct w as p laced in th e back of th e store, an d p oorly d isp layed th ere. N alsan i d ecid ed n ot to let its

p rod u cts be treated like th at an d settled on th e id ea of op en in g its ow n retail stores. N atan Bu rsztyn ’s

w ife’s fam ily, w h ich w as in volved in retail, h elp ed w ith kn ow -h ow in th is regard . In late 1989, Totto

op en ed its first store, on factor y p rem ises —w h ere p eop le w h o h ad seen Totto p rod u cts an d th e

com p an y’s ad d ress in su p erm arkets h ad been com in g to d em an d ad d ition al p r od u cts —bu t qu ickly

follow ed u p w ith oth er, free-stan d in g stores.

Totto p resen ted its first collection in N ovem ber 1990, w h ich w as w ell -receiv ed an d started to

gen erate loyalty am on g you th an d sp orty p eop le w ith in for m al tastes. An d a frien d op en ed a fran ch ise

store in Cali in March 1991, in au gu r atin g an exp an sion str ategy t h at w ou ld be ap p lied to an d p rove

p articu larly critical for Totto’s in tern ation al exp an sion .

Totto’s in ter n ation al store roll-ou t began in 1992 (w h ich w as also w h en it began m an u factu rin g

p rod u cts in as op p osed to sim p ly im p or tin g fabric from Ch in a). Yon atan Bu rsztyn ’s broth er, Sam y

m oved to Costa Rica an d su ggested th at th ey op en a Totto store th ere, u n d er th e fran ch ise m od el. Costa

Rica an ch ored th e d evelop m en t of a system atic ap p r oach to fran ch isin g. Totto looked for p artn ers for

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w h om th e fran ch ised op er ation w ou ld be a m ajor focu s—in stead of big p artn ers in v olved in m u ltip le

lin es of bu sin ess for w h om it m igh t n ot com m an d as atten tion . An d it also kep t on su bfran ch isin g w ith in

Colom bia, w h ich con tin u ed to d om in ate th e com p an y’s sales. .

In tern ation alization con tin u ed w ith en try in to Ecu ad or in 1998, bu t th e even bigger boost to it th at

year cam e from Yon atan Bu rsztyn ’s m ovin g h is fam ily overseas. Wh ile h e con tin u ed to visit Colom bia

every m on th for a w eek at a tim e, th e com p an y w as m ostly ru n by h igh ly-em p ow ered vice p resid en ts an d

h e h ad m ore tim e to th in k abou t its lon ger -ru n strategy. A d ecision w as m ad e to grow th e in tern ation al

op eration s sign ifican tly an d w as reflected in a step p ed -u p p ace of en try in to foreign m ar kets an d a sh ar p

rise in sales ou tsid e Colom bia

Over th e n ext ten year s, Totto exp an d ed its footp rin t to cover m ore th an a d ozen cou n tries in th e

An d es, Cen tr al Am erica an d th e Caribbean cou n tr ies, bu t stayed ou t of th e Sou th ern Con e (alth ou gh it

d id en ter Ch ile in 2010). In p articu lar, Ecu ad or an d Ven ezu ela (w h ich Totto en tered in 2004) accou n ted

for as m u ch as 85% of in tern ation al sales by th e en d of th at p eriod . Bu t sin ce th en , th e p olitical

vicissitu d es in Ven ezu ela h ad sign ifican tly red u ced its sh are of th e total. Totto d id con tin u e to h old a

large sh are of th e m arket in Ecu ad or, w h ere its sm ooth ly ru n n in g n etw ork of 50 -od d fran ch ised stores

con tin u ed to accou n t for as m u ch as 40% of total in tern ation al sales.

As sales r am p ed u p , Totto m ain tain ed bu t d id n ot in crease its p ro d u ction in Colom bia. Th e

com p an y estim ated Colom bian p rod u ction costs to be tw ice as Ch in ese on es —a bu rd en th at m igh t be

bearable for p rod u cts sold in Colom bia bu t n ot elsew h ere. Fran ch isees p aid a m arku p on costs bu t w ere

offered th ree d ifferen t typ es o f p rice lists. If th ey h ad en ou gh d em an d to im p ort con tain er load s, p ricin g

w as FOB Ch in a. If th eir d em an d w as low er bu t th ey d id n ’t w an t to p ay Colom bian taxes, p rod u cts

w ou ld be im p or ted to th e Colom bian free trad e zon e th at th e com p an y u sed an d p ricin g w ou ld be FOB

from th ere. An d for th e (very few ) p rod u cts th at w ere p rod u ced on ly in Colom bia, p ricin g w ou ld be FOB

from w ith in Colom bia, alth ou gh th at im p osed an extra tax bu rd en on th e fr an ch isee. In 2006, th e

com p an y d ecid ed to op en a d irect office in H on g Kon g, as h ad oth er big bran d s from ar ou n d th e w orld ,

in ord er to better m eet th e n eed s of its gr ow in g in ter n ation al op er ation s.

Mexico, w h ich Totto also en tered th at year, w as a p oten tially lar ge m ar ket th at m arked th e n ext

step in th e com p an y’s in ter n ation al exp an sion . Sin ce it seem ed in feasible to fin d a fran ch isee w h o w ou ld

m ake th e in vestm en ts requ ired to ach ieve n ation al cov erage, su bstan tial d irect in v estm en ts w ere requ ired

th ere—an d in Sp ain an d Portu gal, w h ich th e com p an y en tered in 2009 an d 2010 resp ectively. Th u s, in

Sp ain , w h ere retail stores w ere very exp en sive, Totto secu red sh elf sp ace in th e Corte In gles ch ain , w ith

resu lts th at th e com p an y d escribed as “extrem ely good ” an d w as w orkin g th rou gh d istribu tors to p lace

its p rod u cts in sm all m om -an d -p op stores as w ell. It w as also exp lor in g th e m arkets in Greece —w h ere it

h ad p u rch ased a d istribu tor an d w h ich it regard ed as a p oten tial base for exp an sion in th e Balkan s as

w ell—an d in Israel. An d th e Un ited States h ad been d escribed as an oth er very im p ortan t n ext step for th e

com p an y.

Overall, at th e en d of 2012, Totto h ad a lead in g m arket sh are in Colom bia acr oss its 240 ou tlets in 38

cities (in clu d in g th ose op erated by 30 fr an ch isees), 277 ch ain s an d 794 d istr ibu tors an d w as bu ild in g a

large, n ew , state-of-th e-art d istribu tion cen ter. An d its in ter n ation al op er ation s, w h ich accou n ted for 40%

of reven u es (an d a h igh er p rop ortion of u n it sales), in clu d ed 214 stores m ostly op erated by on e of 18

fran ch isees, 64 ch ain s an d 1,637 d istr ibu to rs.

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Exhibit 1

Yonatan Bursztyn receiving the Ernst & Young Entrepreneur of the Year Aw ard, 2011

Sou rce: Ern st & You n g

Exhibit 2

A Totto Store

Sou rce: Totto

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Exhibit 3

Evolution of Stores, 1991-2013

Sou rce: Totto

Exhibit 4

Market Entry Sequence

Sou rce: Totto.com