emerging markets strategy

8/7/2019 Emerging Markets Strategy

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New Economia is a business consulting rm that specializes in emerging markets. We help companiesachieve sustainable growth by capturing unsatised demand in emerging markets. For more information,visit us at www.neweconomia.com
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Table of Contents

I

A PArrogance in Your Companys Approach Will Doom It to Failure 02

Be Early to Market 02

Dont Discount Smaller Markets 02

Set Realistic Targets 03

Localize Decision-Making 03

Dont Underestimate Local Competition 03

Adapt 04

M RMarket Intelligence in Emerging Markets Can Often Be Disappointing 05

Stay on the Ground - Stay in Contact with the Market 05

U EHow Much Can You Trust Numbers? 06

GDP 06

Balance of Payments 06

Budget Decits 07

Ination Rates 08Interest Rates 09

M E PProt Margins are Higher in Emerging Markets 10

Pre-Entry Due Diligence 10

M DAdvertising Adaptation 12

Brand Management 12

Local Distribution Channels vs. 13

Creating Your Own Distribution Network

TRecruitment 14

Retention 14


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Disclaimer: this document is intended for information purposes only. None of the information in this document should be taken as professional advice. NewEconomia, and its employees as individuals, are not responsible for actions taken as a result of reading this document. ose wishing to invest in emerging

markets should seek professional advice. May we suggest, New Economia.

Copyright: All Rights Reserved byNew Economia International, LLC (2011). Permission is granted to copy and distribute, without charge,the pages of this document on the condition that credit is given to the author and all copies are distributed in unaltered form.

Table of Contents

AWhen Does It Make Sense? 15

Due Diligence 15

Restructuring & Other Post-Acquisition Issues 16

Joint Venture 17

C M, P R CForeign Corrupt Practices Act 18

Political Volatility & Government Intervention 18Weathering the Storm 19
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New Economia

Mature markets in developed countries are often saturated and highly

competitive. A few large rms dominate the industry, while smaller,

boutique rms operate in niche markets that the larger rms neglect.

Market share is mostly determined by marketing tactics and entrench-

ment. To nd growth, companies must constantly engage in the risky

endeavor of researching, developing, and bringing new products to the

market. Increasingly, this competition is global; large rms now have to

compete with other large rms around the world or face elimination. To

get an edge, rms are realizing that emerging markets must be an

integral part of their long-term global strategy.

Emerging markets oer growth. With approximately eighty percent of

the worlds population living and consuming in a developing country,

emerging markets give companies access to a potential customer base

larger than ever before seen. On average, emerging markets grow three

times faster than the developed world. is growth shows no signs of

slowing as the developing world catches up to the developed world.

Opportunities are abound, but navigating these growth opportunities

should be done with caution, and only after proper due diligence has

been paid. In the emerging markets environment, success depends

heavily upon strategy.

INTRODUCTION

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New Economia

AVOIDING PITFALLS

Why

How toApproach

e idea that your companys past successes in the developed world will automatically transfer tothe developing world is awed. Using tried and tested techniques from your home market is not

likely to produce anything more than small short-term sales gains as few curious consumers will

test your product. Do not take your success in the developed world as a sign that the same,

unmodied products will be successful in your chosen emerging market.

Instead, to be successful in emerging markets, companies must only enter after adequate prepara-

tion and market research. Adapt your product to local tastes and culture. Do not assume that you

will automatically be a market leader because your product is superior or foreign. Consumers in

emerging markets are just as choosy as their developed world counterparts.

A

Why

How toApproach

As signicant opportunities arise in an emerging market, like in the developed world, entrepre-

neurs and established companies are quick to seize it. Also like the developed world, as a market

matures and customers develop their loyalties, it becomes dicult (but not impossible) to

persuade consumers to switch brands. ese opportunities arise quickly and are seized quickly.

Companies should not wait for outward signs of excess demand before they consider entering

a market. By this time it is probably too late to take advantage of benets of being the only

supplier, as other companies will have seen these opportunities as well. ey should be follow-

ing your leadership. Demand is often dicult to predict and fully access in emerging markets.If there are signs of excess demand, then you can be sure that actual demand is far above what

can be measured.

B E M

Why

How toApproach

So much focus in the media, and therefore boardrooms across America, is on BRIC (Brazil,

Russia, India, and China) at the expense of other countries. BRIC markets oer great opportu-

nities for sustained growth, but so do the SAf (Southern Africa) and ChAP (Chile, Argentina,

and Peru) markets. ese markets may be smaller in terms of population and GDP, but they

oer similar sustainable growth opportunities. Moreover, these ignored markets will usuallyallow an early entrant to reap higher prot margins as they face less competition.

It is important not to base your approach on emerging markets on media reports, regardless of

the sources reputation. News reports on a country, an economy, or even a market are made for

mass consumption and therefore are prone to leave out important information that will be

crucial in your decision making. You should always consult an expert in emerging markets

entry as well as an expert in the country you are trying to enter. Moreover, news reports tend

to focus on the negative and the short-term.

D

Botswana 2010: Business Environmen

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A lack of reliable and consistent market information coupled with all types of common uncer-tainties found in emerging markets make it dicult to predict sales. Sales will occur and margins

will be high based on developed world standards, but demand volatility will make it tough to

predict until your company is more established in the country.

e best policy is to take a long-term approach to prots. ere is a company learning curve in

emerging markets. After consulting experts on the region, set the most realistic annual targets,

then budget less than that.

New Economia

Why

How toApproach

S R T


It is hard to manage the fast-paced world of emerging markets from afar. Decisions usually need

to be made quickly. Moreover, local managers (especially if they are actual locals) will have a

better feel for what the trends are in the market and where the company best ts.

Underinvestment is often a symptom of short-termism. Companies entering emerging markets

should be focused on the long term, as all aspects of emerging markets investment take time to

develop, from market entry preparation to entry (whether through acquisition, joint venture, or

otherwise) to prot materialization. Such resource mismatch, that is, failing to put in adequate

resources to give the venture a real chance of success, will cost you more in the long-term thansimply paying for a proper entry strategy upfront. Instead, companies should establish a local

presence in the target country who will prove invaluable in preparing the ground and providing

direct, primary market intelligence.

Why

How toApproach

L D-M

Local competitors are becoming formidable in a number of markets. ey know their customers

and the market in which they operate better than you do and they have a head start in making

the necessary connection, government and otherwise. ey are usually concentrated in the lower

market segment and can be quite the competitor if you encroach on their turf by using their

government connections or other methods to lower their prices well below what you could

match.

Why

D

Avoiding Pitfalls, continued

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New Economia

Botswana 2010: Business Environme

It is important to always consider dierences in sensitivity in price and taste. One eective

approach is to divide your market into several segments and then develop products for all of

them. It could be the dierence between something as simple as whether your lamp comes withor without a shade (some will prefer that it does, others will not) that determines if it is deemed

a bargain and is thus purchased. is is standard equipment in the developed world and often

managers nd it hard to understand this reality.is approach is called strip-down innovation

and is crucial to nding success in emerging markets. Although the example used here is simple,

the principle applies across the board to all products, complex and not.

How toApproach

Avoiding Pitfalls, continued

simply transplant their pricing structure from the developed world. is approach often leads to

failure. Likewise, customers in emerging markets are guided by local customs and culture in

their tastes. ey are not likely to nd products appealing for the same reasons that their devel-

oped counterparts do. Take Levis in China for instance, where the brand is seen as a luxury item

because of its import status and other reasons, while in its home market it is a conventional

brand (also see Pabst Blue Ribbon).

Customers in emerging markets are more price-sensitive in all segments of a market. Even

upmarket customers will look elsewhere if prices rise too high. Unfortunately, many companies

A

Why

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New Economia

MARKET RESEARCH

Why

How toApproach

In emerging markets there is rarely the maturity of economy and development where you wouldnd quality data gathering. Moreover, accounting practices, securities registration procedures,

business laws, and other economic management mechanisms in emerging markets are often lax or

poorly enforced. It is not wise to depend on or trust numbers given by companies or governments.

Market surveys are likely to receive a poor response and be otherwise of low quality since demand

is so volatile and subject to change from month to month or week to week.

Here is where it is especially wise to hire an expert who has experience in emerging markets.

Primary research is essential. Consulting rms can take a global approach and nd out how

similar products have done recently regionally, or can test your product in a sub-region of your

targeted market.

M

Why

How toApproach

Staying on top of trends all trends in your targeted region will signicantly increase your

chances of accurately predicting the prospects for your product in the future. Having contacts

(or hiring a rm that does) in government and the private sector is a great way to take the pulse

of your business environment. In emerging markets, it is not uncommon for managers to

frequently socialize and discuss how to handle business issues they might share. Likewise, in

emerging markets government ocials are much more accessible, especially to those in the

business community.

An excellent source of information about your product and its place in its market is your

customers. Your company should have someone on the ground constantly talking to your

customers.

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New Economia

UNDERSTANDING THE ECONOMY

Why

How toApproach

Quality of the economic numbers provided by the government varies from country to country.

However, unless you know otherwise, you should assume that the numbers are o either by way

of poor data gathering, government boasting, inecient calculating, or neglect of the under-

ground economy. e underground economy in some countries can rival the size of the ocial

economy and will thus render any number supplied by the government useless. GDP per capita

may actually be $7,900, while ocially it is $4,300. is is a signicant discrepancy that would

likely be a major factor in a companys decision to enter a market.

Look at trends. Is the per capita GDP trending up? Is the government borrowing more and more

money each year? What is the government spending that money on?

H

Why

How toApproach

Gross domestic product is an outdated and dubious indicator, but it is especially so in the devel-

oping world. Not only is the number subject to inaccuracy for the reasons mentioned above, but

even if accurate, it does not convey much information other than the market value for goods and

services produced in a given year. GDP tells only part of the story. It is akin to the revenue gure

for businesses, which is also useless what is important is prot. In sum, like revenue, GDP is

informative in context and for a limited set of purposes, but it certainly should not be the focus

of your analysis.

Unfortunately, the gures that you should be looking for almost always are not readily available

in developing countries. ese are gures, such as the velocity of money, savings rates, and

discretionary spending. Until you can make these gures available to you, it is advisable to

improvise. Take the GDP per capita for instance. If you are able to nd a reliable median

income number and it is close to that mean (the GDP per capita), then you will have a pretty

good idea about the availability of a middle class, which in turn will advise you on the likely

velocity of money.

GDP


Why You want to watch the balance of payments, but especially the current account. A currentaccount decit is the result of actions that create a demand for foreign currency (think increased

demand for imported goods, which must be paid for in foreign currency). is eventually can

lead to currency devaluation, which would eat into your prots as you convert your earnings

B P

(continued on next page)

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New Economia


How toApproach

Balance of Payments, continued

into other currencies. e standard international benchmark is a four percent current account

decit (that is, if the current account decit is equal to four percent of the GDP). At this point

there is an increased chance of currency depreciation. In practice this is not always a good wayto measure this danger; there are several factors that can make it more or less likely that a

currency will depreciate. One should always look to the countrys foreign exchange reserves; this

will tell you if the country has adequate foreign exchange to cover the increased demand. e

rule of thumb is that reserves should cover at least three months of imports.

Another way that the country can buer a current account decit that is more than four percent

is if it has a high incidence of foreign direct investment. If investment ows are high or rising

and cover a large portion of the decit, the currency is likely no longer in danger, as the foreign

currency pouring in will allay the strain on the local currency.

Likewise, a capital account decit is an indicator of possible currency devaluation as well. esedecits arise from actions that result in a decrease in supply of currency. Hot money is the term

for short-term capital movements. ese include investments in highly liquid assets such as

treasuries and stocks. Sudden outows of these investments can decrease the supply of foreign

currency which can put the currency in danger of devaluation.

A company should always look to determine whether the imports that are creating the imbalance

are largely consumer goods or capital goods inows. If a large portion of the imports are for

capital goods, it may be an indicator that the economy is retooling, which should result in higher

exports over time.

Why A budget decit occurs when government expenditures exceed its revenue. Governments recon-cile this deciency by borrowing (that is, issuing treasuries) or printing money. Borrowing is

only a good option if the return on the money borrowed is higher than the price of the money

(that is, the interest rate). For instance, if the government uses the borrowed money to build a

bridge or on some other high-value infrastructure project, then it is conceivable that the higher

B D


Note: currency devaluation occurs when,because of demand or supply issues (on either side of thetrade, that is, local or foreign currency), the value of the local currency decreases. is means that ittakes more units of the local currency to buy a single unit of the foreign currency than it did before.Like all markets, the price of currencies is determined by supply and demand where if there is asudden increase in the supply of foreign currency (by way of exports or hot money) its value relative to

local currency will decrease.

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New Economia


How toApproach

Budget Decits, continued

tax revenue from the increased economic activity brought on by the investment may be worth

more than the interest payments on the issued treasury bonds. Printing money on the other

hand is never a good option, and can lead to hyperination (a vicious circle phenomenon that

leads to ination rates in excess of 100 percent). If the central bank is buying the issued securi-ties, this is similar to printing money since the government is essentially borrowing from the

central bank where the money is printed.

Companies should pay close attention to budget decits and trends in government spending.

Look to see whether the government is having decits because of heavy investment in the

economy or if the borrowing is going toward short-term transfers to pay outstanding debt,

salaries, or to pay for welfare programs. Look at the government debt in general to get a picture

of the countrys scal responsibility (it is still a good idea to put this gure in context as to how

they are spending the money). As a general rule, developing countries should not have debtabove 45 percent of GDP. Look at the governments ability to borrow and at the overall debt to

see if it is at a level that will scare investors. Or look at the governments history of repayment

they may have defaulted on some treasuries in the recent past. Also consider and research (or hire

the research) what the o-budget decit may be. Like companies, governments often use

creative accounting practices to keep certain matters o of the ocial budget.

Why High ination rates can cut into a companys prots. Ination is tougher to control in small,emerging economies. Where developed countries have entire departments dedicated to ination

targeting within the central bank, developing countries usually do not target ination. Since so

much of the economy is not within their control they simply try to predict and control ination.

e central bank can do this through monetary policy. e government working indepen-

dently can intervene in the economy to curb ination where possible.

I R

How toApproach

Companies should conduct their own research into ination. It is important to do your own

research because the governments numbers may not only be unreliable, but they may be

misleading. Governments use a consumer price index the tracking of the prices of a basket ofgoods and services that is supposedly used by the typical household to measure ination.

However, governments that want to show low ination will sometimes include products

supported by government subsidies. e best way to nd out how ination will aect your

companys sales is to go directly to the consumer and ask.

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New Economia

Botswana 2010: Business Environme

Why Interest rates are often manipulated by central banks. is can signal changing policy with thebank or government, or it can signal the banks response to changes in the economy. High inter-

est rates can bring a ood of capital to the country as investors chase the highest returns. How-

ever, investors will not bring their capital to the country if ination is too high. Ination can

reduce the actual or real interest rate by lowering the purchasing power of the money paid back

to lenders, thus decreasing the amount investors receive. If ination is higher than the nominal

interest rate, then the real interest rate can actually be negative. is can lead to a ight of capital

which increases interest rates until interest rates rise to a level above ination.

I R

How toApproach

Companies should try their best to stay ahead of the curve. If they have been tracking ination

on their own, they will have an idea of the real interest rate. ey can use that to forecast govern-

ment and private sector behavior and prepare accordingly. Companies should also note thatduring economic downturns, emerging market governments often raise interest rates (through

the regular government operations: open market operations, reserve requirements, etc.) sharply

with the aim of keeping capital in the country and attracting speculative funds from abroad,

which will give the local currency a boost. is is important because it may not be what compa-

nies expect as it is the opposite of what happens in developed markets.

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New Economia

MARKET ENTRYPREPARATION

Why

How toApproach

Because companies face such highly competitive environments in the developed world they must

lower their prices to get sales. Prot margins can be relatively low in the most competitive of

markets. While the scale and intensity of competition in emerging is well below that found in the

developed world. Depending on their positioning and the marketing campaign, companies can be

exceptionally brave with pricing, as they usually face little competition of similar quality. Prot

margins, of course, depend on product cost, which can be controlled through local sourcing.

Companies should conduct thorough research into the market and its deciencies before setting

any pricing strategy. e most ecient approach is to hire a consultant on the ground who can

help you understand the proper pricing.

P

Why

How toApproach

Too many companies signicantly limit their chances of success in emerging markets by not

properly preparing the ground with thorough and accurate due diligence. Companies can be

misled by media reports and popular rumor about any particular emerging market. Going in

solely on those grounds will certainly lead to failure. For instance, many media outlets, some of

them nancially sophisticate perhaps lazily report that China or India have over one billion

potential consumers. While in reality, in China, India, and so many developing countries, a

signicant proportion, if not most of the population in these countries, will be extremely poorand living outside of the cash economy at a subsistence level.

e depiction of your target country in a popular entertainment programs or a prole in a nan-

cial magazine may lead you to believe that there is extraordinary demand for your product, a lack

of competition, or any other favorable market condition. Market conditions are rarely how they

portrayed as through the media, whether in the movies, news programming, or nancial maga-

zines. It would be an understatement to say that conditions in emerging markets change

frequently and at a rapid pace.

Your company should conduct its due diligence in tandem with an experienced expert in your

target countrys economic history. It is important to take into account the trends of the market

you are looking to enter, both past and future. You want to examine all facets of your businesss

operations in the new country. Will you be able to nd the right employees? Will you be to nd

adequate sourcing at an acceptable price, locally, or regionally? What is your competition? Do

you expect more entrants to the market? Have many companies failed in this market? If so, why?

P-


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New Economia

MARKETING & DISTRIBUTION

Why

How toApproach

Besides price and local tastes, advertising plays a large part in the success of a product in an emerg-

ing market. It is important that companies understand going in that customers in emerging

markets may not be susceptible to promotional messages that work in the developed world. ey

are inuenced by local cultures, which shape their habits and preferences. And thus, advertising,

like everything else in emerging markets, is local. Becauselimits on mobility in developing coun-

tries isolate geographical regions of the country to a degree not seen in the developed world,

cultural values and tastes can swing wildly from province to province much more so than the

north/south or east/west divide in the US and other Western regions. Some companies have man-

aged to localize from province to province where it has been deemed prudent in some countries.

It is crucial that companies pay close attention to the culture of the country they are entering and

are careful not to oend consumers by being insensitive to their customs. For instance, it has been

shown that dubbed advertising from the West is usually considered disrespectful and irritates

local pride. Although a company may not have intended to oend with the advertising, by not

carefully researching what would be acceptable to customers, the company is just as culpable.

Take your cues, rst from what other movers in region have done, then focus group your custom-

ers until you obtain an appropriate level of comfort of which potential customers will respond

positively.

A

Why

How toApproach

Controlling what your brand conveys to your customers and potential customers is wise for

obvious reasons. However, in emerging markets you must also consider that 1) your brand is prob-

ably not known and 2) if it is known, it may not be a positive that it is a foreign product. It is not

the norm that foreign products are automatically disadvantaged, since foreign products are usually

of higher quality or can represent a level of exclusivity. e point is that you should know what

you are facing in terms of recognition when entering a market.

Most likely you will have to build your brand from scratch when entering a market. is can

present several positive opportunities. First, you will have the opportunity to position your prod-

uct in a more desirable segment of the market if this was not feasible in your home market. You

could also create an entirely new brand for positioning wherever you like. If your brand is known

and discriminated against by customers because of its origin, this may be an easy, viable solution.

Or, if you are worried about various forms of brand dilution that may be caused by launching

your brand in a particular emerging market (counterfeiting for export to your home market, or

general counter brand behavior by launching outside of its home market) a new brand will solve

these potential problems. Companies should consider launching an entirely new, local business

organization when creating new brands instead of the branch approach.

B M

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New Economia

Why

How toApproach

Poor distribution networks are par for the course in developing countries. ey are also a majorreason why so many companies fail to maintain any successes they had when they introduce their

products, as companies are unable to keep their products in stores consistently and meet the

increased demand. Distribution networks are more often than not fragmented, inecient, and

full of risky or unreliable managers. Although it may be dicult to nd the right set of partners

to keep your product readily available to customers, approaching a region you are unfamiliar with

on your own may be more daunting a task.

Be involved: visit warehouses, survey distribution routes, and interview owners. You should check

the relationship that distributors have with retailors to nd out which distributors have the best

reputations. Are the distributors providing proper after-sales support? Where you see decienciesin the distributors abilities, provide support. You can upgrade a sales or delivery vehicle, or

provide training on some technical aspects of delivery systems.

Stay involved: control pricing, control your brand, and communicate your goals to the distribu-

tor. Your distributors will probably be managing several brands, and therefore will not be nely

in tune with your marketing strategy as you would like them to be. Make it easy for them. Give

them clear marketing guidelines to use if they must, but marketing and brand management

should lie with the entering company. To keep distributors from selling your products at a higher

price than you set out, keep the public abreast of what the price should be through regular and

on-package advertising. In short, your goal with distributors should be to ensure as much control

as possible over the network. One way to do this is to set out in your contracting with thedistributor that there should be a key person who will report to your company regularly, prefer-

ably daily. ese tactics are especially useful in rural areas. However, in most emerging markets,

economic activity is mostly concentrated in urban areas, and you will likely have to set up your

own crude network for those areas. is may be an opportunity for you to partner with one or

more of your higher-performing distributors and create the rst network in the area.

Nevertheless, you should handle large and special accounts yourself. Regardless of the eort you

put into developing your distribution network, distributors will not care about your clients

satisfaction as much as you do.

L .


Marketing & Distribution, continued

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New Economia

TALENT

Why

How toApproach

In most developing countries the pool of qualied talent is shallow. With strong demand and

weak supply, recruitment and retention is a battle that companies will nd consumes a great deal

of their energy especially in the early stages of their entry into a new market. Demand is strong

for local talent because they are the ones who will best be able to establish personal relationships

with customers, partners, and government ocials.

If you must hire an expatriate, look for employees with international exposure and a passion for

the region in which they will be working. To send an unwilling employee based solely on reasons

of seniority or familiarity with the product will end in disaster. e work is too involved to nd

success without the requisite eort. Recruitment issues improve once the market has been estab-lished. Universities begin to oer programs in the eld and training programs allow local talent

to learn new skills from the developed world. You should use locally-based human resource

consultants. ese are the people who will best know a candidates skills for a specic local

market.

R

Why

How toApproach

For the same reason recruitment is a problem in emerging markets, employee retention is an issue

as well (short supply, great demand). In emerging markets, turnover is higher than companies maybe used to, poaching is not uncommon, and pay packages are somewhat inated.

Retaining qualied sta in the developing world often means paying more for talent

(management level) than a comparable position in the developed world. Companies should strive

to stay competitive for top talent as the component to your emerging markets is crucial. More

than likely, the dierences in pay can be recouped in market rate pay for lower level employees.

Pay alone, however, is not going to keep all of your employees happy. Many, if not most, will be

looking for a chance to learn from your company through increased responsibilities or cross train-

ing into new elds. Paying for a managers continued education is very common in emerging

markets, as it is benecial to both sides. e main goal is to be creative, listen, and be responsive

to your employees needs.

Stay on the general good practice of keeping employee satisfaction a priority. Many companies

perform an enhanced schedule of employee satisfaction reviews.

R

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New Economia

ACQUISITIONS

Why

How toApproach

Many companies feel that if the market is suciently developed and there is an appealing target

with measurable upsides, it is easier to enter the market through acquisition and improve the

acquired companys position.

You should consider buying a local company whenever it is determined that the target company

has something of value that will increase your chances of success in the country whether it be a

trusted brand name, an exclusive distribution network, or some other valuable asset. After a

company has decided that it is prudent to acquire a local company, the process should be to:

1) identify candidate companies (if one has not already been picked) 2) perform due diligence

3) based on that due diligence set a price for the target 4) negotiate and purchase the target and5) restructure the company and integrate it into your regional strategy.

W

Why

How toApproach

Acquiring companies in emerging markets is complex. Most companies make mistakes in the

acquisition process because of poorly executed due diligence before the purchase or poor manage-

ment during post-acquisition restructuring. Both of these tasks are innitely important in making

acquisitions work. It is estimated that more than half of all acquisitions fail to add value.

Due diligence is meant to uncover all details of a company if done properly, there will be no

surprises after the transaction has been done. Before you make the long-term commitment of

purchasing a company, you will want to know what exactly you are purchasing, from its owner-

ship and manager, to sales and sales forecasts, to any legal troubles, to employees and company

culture, and so on. ere is a list 100 miles long of questions you will want to ask, people you will

want to speak to, and documents you will want to review. But your goal in asking all of these

questions should be to answer, completely, this one question: can the target be restructured and

managed in a way that helps protably grow our business?

e answer should be yes. If it is not, do not buy. However, to get the answer to that question

you have to nd the answer to several others rst.

Legal and nancial auditA legal audit is usually designed to look at such things as the organization structure, contracts and

other corporate agreements, intellectual property security, labor contracts, and any current or

potential legal actions where the company will be named as a defendant. e organization infor-

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New Economia

Botswana 2010: Business EnvironmeDue Diligence, continued

-mation should be led with the state. If your target business is not registered with the state or

for some other reason is not legitimate, your rst step should be to remedy that immediately. You

will want to obtain all registration papers from the state and copies from the ownership toconrm that business is what they say it is. You will obtain supply, joint venture and other miscel-

laneous contracts from the ownership. Review these contracts and speak to the other side to

ensure that they are still in force and that they are willing to honor the contracts or renew them

if they are close to coming to term (you will want to check the countrys laws to determine

contract-assignees rights).

You should conduct a similar review of the companys nancial statements. For loose accounting

and other reasons you will want to follow up (as much as possible) with the bank to conrm

deposits, retailers and customers to conrm sales, and vendors to conrm purchases. You cannot

aord to take nancial statements for granted and believe what is written there.

You will want to talk to managers and employees to get a variety of opinions and insights in

which to consider. Listen to their concerns and ask them what it would take to stay committed

after the transition. Pay attention to all stages of your due diligence. Mistakes made at this stage

can cost.

Why

How toApproach

Most emerging market businesses will require a substantial overhaul if they are to become an

integral and successful part of the buyers company. A pressing issue will be productivity and

eciency. e rst step in integration and upgrading these measures for an acquiring rm usually

involves layos. Often the acquired rm is bloated and operating far from peak eciency.

Depending on culture and community demands, some acquired rms may own their own kinder-

gartens or operate re brigades and thus may be overly vertically integrated. Chances are that the

rm has some excesses that it survived with.

A company should look to spin o any parts of the business that are not essential to the function

the acquired company will serve within your organization. Foreign rms that come in, take over

a local rm, and re a signicant portion of the sta usually create hefty public relations problems

for themselves. One strategy to consider is to hire a public relations rm, and to create a solid andvisible outplacement and retraining program for employees that will not be transitioning. More-

over, owners may sometimes require that purchasing contracts stipulate that there be no layos

for a period of time. ese should be avoided when possible, perhaps with an assurance of the

outplacement and retraining program, but can be a chance to properly evaluate the talent on

hand and choose more condently those who will stay and those who will not.

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Why

How toApproach

Many developing countries, in an attempt to emulate other countrys success or to empower their

citizens, require foreign rms to partner with a local rm in order to obtain licenses to operate. It

is a development strategy used by various countries, both developed and developing.

You should consider joint ventures as an option only if you must. Surveys have shown that over

a ten-year period, less than 20 percent of joint ventures survive. ey are prone to friction and

culture clash. A better option, if available, is always to hire the resources you need.

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CRISIS MANAGEMENT,POLITICAL RISK & CORRUPTION

How toApproach

Dealing with corruption, unfortunately, is a part of daily life in emerging markets. Some countries are rampantly

corrupt; others may have less corruption but be harder to deal with because it is not so obvious. Although it is

possible to operate in emerging markets without participating in the corruption, you must assume that your

competition is to develop an eective strategy.

e Organization of Cooperation and Economic Developments Convention on Combating

Bribery of Foreign Public Ocials in International Business Transactions, the USs Foreign

Corrupt Practices Act, the UKs Bribery Act 2010, and other laws should serve as an adequate

deterrent to engaging in any corrupt practices. ese laws prevent you from turning a blind eye

to what your aliates and agents do. You are responsible for their behavior and must remain

vigilant. If, however, the US and other laws do not motivate you to keep it clean, consider that

corruption allegations create tremendous PR problems and will likely cost you more in cleanup

cost and lost sales than you will gain from the corrupt act.

Note: FCPA rules are complex and intricate. For instance, the FCPA dierentiates between facilitatingpayments and bribes. What is written here should not be taken as legal advice. You should consult alawyer who can provide complete analysis to your unique situation.

F C P A

Why

How toApproach

Doing business in emerging markets means also having to deal with the government of developing

countries, which are prone to much more volatility in law making, interpreting, and enforcement.

It comes with the territory. Governments of developing countries can have changes in leadership

that are much more abrupt than companies are used to. ey may be run by authoritarian regimes

who are prone to interfere in all aspects of the private sector by decree. Judicial systems may not

be suciently independent, and law enforcement agencies may discriminate in the cases they

decide to pursue.

Carry an amount of skepticism when dealing with governments and have a Plan B available

and ready in case you were either intentionally misled by the government or the government for

some other reason fails to meet its promise. Study the previous record of the government and see

its track record. Talk to other members of the market to see what their experience has been with

the government.

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Why

How toApproach

Volatility is a characteristic of emerging markets. ey are hit disproportionately by crisis. eir

peaks and troughs are often more severe than in the developed world. Governments are usuallytoo inexperienced, dispersed, or unstable to be eective.

During a recession companies should ght the inclination to pack up and leave. Emerging

markets bounce back from troughs in their business cycles at an astonishing rate and with little

forewarning. Loses will most likely be short-term before the economy returns to normal. Even if

losses are sustained longer than expected, companies should use the opportunity to hire top talent

that other companies shed in order to emerge stronger after the economy returns to normal.

If pressures to cut cost become too great, companies should look into cutting pay and not sta.

Sta recruitment is hard enough, and it would most benecial to endearing top talent to yourrm by employing them in tough times. You will likely nd it easier not only to recruit talent at

a lower wage but to retain your current talent at a lower wage, as jobs in the depressed market will

likely be scarce.

W

Botswana 2010: Business Environment

emerging markets strategy

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