Competitive Market Strategy for Emerging Industry

Emerging Markets
Strategy
Best Practices
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New Economia is a business consulting frm that specializes in emerging markets. We help companies
achieve sustainable growth by capturing unsatisfed demand in emerging markets. For more information,
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Table of Contents
I
A P
Arrogance in Your Company’s Approach Will Doom It to Failure 02
Be Early to Market 02
Don’t Discount Smaller Markets 02
Set Realistic Targets 03
Localize Decision-Making 03
Don’t Underestimate Local Competition 03
Adapt 04
M R
Market Intelligence in Emerging Markets Can Often Be Disappointing 05
Stay on the Ground - Stay in Contact with the Market 05
U E
How Much Can You Trust Numbers? 06
GDP 06
Balance of Payments 06
Budget Defcits 07
Infation Rates 08
Interest Rates 09
M E P
Proft Margins are Higher in Emerging Markets 10
Pre-Entry Due Diligence 10
M D
Advertising Adaptation 12
Brand Management 12
Local Distribution Channels vs. 13
Creating Your Own Distribution Network
T
Recruitment 14
Retention 14








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Table of Contents
A
When Does It Make Sense? 15
Due Diligence 15
Restructuring & Other Post-Acquisition Issues 16
Joint Venture 17
C M, P R C
Foreign Corrupt Practices Act 18
Political Volatility & Government Intervention 18
Weathering the Storm 19


New Economia
Mature markets in developed countries are often saturated and highly
competitive. A few large frms dominate the industry, while smaller,
boutique frms operate in niche markets that the larger frms neglect.
Market share is mostly determined by marketing tactics and entrench-
ment. To fnd 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 frms now have to
compete with other large frms around the world or face elimination. To
get an edge, frms are realizing that emerging markets must be an
integral part of their long-term global strategy.
Emerging markets ofer growth. With approximately eighty percent of
the world’s 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. Tis 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
1
New Economia
AVOIDING PITFALLS
Why
How to
Approach
Te idea that your company’s past successes in the developed world will automatically transfer to
the developing world is fawed. 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,
unmodifed 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 to
Approach
As signifcant 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 difcult (but not impossible) to
persuade consumers to switch brands. Tese 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 benefts of being the only
supplier, as other companies will have seen these opportunities as well. Tey should be follow-
ing your leadership. Demand is often difcult 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 to
Approach
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 ofer great opportu-
nities for sustained growth, but so do the SAf (Southern Africa) and ChAP (Chile, Argentina,
and Peru) markets. Tese markets may be smaller in terms of population and GDP, but they
ofer similar sustainable growth opportunities. Moreover, these ignored markets will usually
allow an early entrant to reap higher proft margins as they face less competition.
It is important not to base your approach on emerging markets on media reports, regardless of
the source’s 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 Environment
2
A lack of reliable and consistent market information coupled with all types of common uncer-
tainties found in emerging markets make it difcult 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.
Te best policy is to take a long-term approach to profts. Tere 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 to
Approach
S R T
Botswana 2010: Business Environment
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 fts.
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 proft 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 than
simply 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 to
Approach
L D-M
Local competitors are becoming formidable in a number of markets. Tey 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. Tey 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
3
New Economia
Botswana 2010: Business Environment
It is important to always consider diferences in sensitivity in price and taste. One efective
approach is to divide your market into several segments and then develop products for all of
them. It could be the diference between something as simple as whether your lamp comes with
or without a shade (some will prefer that it does, others will not) that determines if it is deemed
a bargain and is thus purchased. Tis is standard equipment in the developed world and often
managers fnd it hard to understand this reality.Tis approach is called “strip-down innovation”
and is crucial to fnding success in emerging markets. Although the example used here is simple,
the principle applies across the board to all products, complex and not.
How to
Approach
Avoiding Pitfalls, continued
simply transplant their pricing structure from the developed world. Tis approach often leads to
failure. Likewise, customers in emerging markets are guided by local customs and culture in
their tastes. Tey are not likely to fnd products appealing for the same reasons that their devel-
oped counterparts do. Take Levi’s 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
4
New Economia
MARKET RESEARCH
Why
How to
Approach
In emerging markets there is rarely the maturity of economy and development where you would
fnd 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 frms can take a global approach and fnd out how
similar products have done recently regionally, or can test your product in a sub-region of your
targeted market.
M
Why
How to
Approach
Staying on top of trends – all trends – in your targeted region will signifcantly increase your
chances of accurately predicting the prospects for your product in the future. Having contacts
(or hiring a frm 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 ofcials 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.
S –
Botswana 2010: Business Environment
5
New Economia
UNDERSTANDING THE ECONOMY
Why
How to
Approach
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 of either by way
of poor data gathering, government boasting, inefcient calculating, or neglect of the under-
ground economy. Te underground economy in some countries can rival the size of the ofcial
economy and will thus render any number supplied by the government useless. GDP per capita
may actually be $7,900, while ofcially it is $4,300. Tis is a signifcant discrepancy that would
likely be a major factor in a company’s 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 to
Approach
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 fgure
for businesses, which is also useless – what is important is proft. 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 fgures that you should be looking for almost always are not readily available
in developing countries. Tese are fgures, such as the velocity of money, savings rates, and
discretionary spending. Until you can make these fgures available to you, it is advisable to
improvise. Take the GDP per capita for instance. If you are able to fnd 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
Botswana 2010: Business Environment
Why You want to watch the balance of payments, but especially the current account. A current
account defcit 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). Tis eventually can
lead to currency devaluation, which would eat into your profts as you convert your earnings
B P
(continued on next page)
6
New Economia
Botswana 2010: Business Environment
How to
Approach
Balance of Payments, continued
into other currencies. Te standard international benchmark is a four percent current account
defcit (that is, if the current account defcit 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 way
to 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 country’s foreign exchange reserves; this
will tell you if the country has adequate foreign exchange to cover the increased demand. Te
rule of thumb is that reserves should cover at least three months of imports.
Another way that the country can bufer a current account defcit that is more than four percent
is if it has a high incidence of foreign direct investment. If investment fows are high or rising
and cover a large portion of the defcit, 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 defcit is an indicator of possible currency devaluation as well. Tese
defcits arise from actions that result in a decrease in supply of currency. Hot money is the term
for short-term capital movements. Tese include investments in highly liquid assets such as
treasuries and stocks. Sudden outfows 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 infows. 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 defcit occurs when government expenditures exceed its revenue. Governments recon-
cile this defciency 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
(continued on next page)
Note: currency devaluation occurs when,because of demand or supply issues (on either side of the
trade, that is, local or foreign currency), the value of the local currency decreases. Tis means that it
takes 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 a
sudden increase in the supply of foreign currency (by way of exports or hot money) its value relative to
local currency will decrease.
7
New Economia
Botswana 2010: Business Environment
How to
Approach
Budget Defcits, 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 hyperinfation (a vicious circle phenomenon that
leads to infation 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 defcits and trends in government spending.
Look to see whether the government is having defcits 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 country’s fscal responsibility (it is still a good idea to put this fgure in context as to how
they are spending the money). As a general rule, developing countries should not have debt
above 45 percent of GDP. Look at the government’s ability to borrow and at the overall debt to
see if it is at a level that will scare investors. Or look at the government’s history of repayment –
they may have defaulted on some treasuries in the recent past. Also consider and research (or hire
the research) what the of-budget defcit may be. Like companies, governments often use
“creative” accounting practices to keep certain matters of of the ofcial budget.
Why High infation rates can cut into a company’s profts. Infation is tougher to control in small,
emerging economies. Where developed countries have entire departments dedicated to infation
targeting within the central bank, developing countries usually do not target infation. Since so
much of the economy is not within their control they simply try to predict and control infation.
Te central bank can do this through monetary policy. Te government – working indepen-
dently – can intervene in the economy to curb infation where possible.
I R
How to
Approach
Companies should conduct their own research into infation. It is important to do your own
research because the government’s 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 of
goods and services” that is supposedly used by the typical household – to measure infation.
However, governments that want to show low infation will sometimes include products
supported by government subsidies. Te best way to fnd out how infation will afect your
company’s sales is to go directly to the consumer and ask.
8
New Economia
Botswana 2010: Business Environment
Why Interest rates are often manipulated by central banks. Tis can signal changing policy with the
bank or government, or it can signal the bank’s response to changes in the economy. High inter-
est rates can bring a food of capital to the country as investors chase the highest returns. How-
ever, investors will not bring their capital to the country if infation is too high. Infation 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 infation is higher than the nominal
interest rate, then the real interest rate can actually be negative. Tis can lead to a fight of capital
– which increases interest rates – until interest rates rise to a level above infation.
I R
How to
Approach
Companies should try their best to stay ahead of the curve. If they have been tracking infation
on their own, they will have an idea of the real interest rate. Tey can use that to forecast govern-
ment and private sector behavior and prepare accordingly. Companies should also note that
during 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. Tis is important because it may not be what compa-
nies expect as it is the opposite of what happens in developed markets.
9
New Economia
MARKET ENTRY PREPARATION
Why
How to
Approach
Because companies face such highly competitive environments in the developed world they must
lower their prices to get sales. Proft 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. Proft
margins, of course, depend on product cost, which can be controlled through local sourcing.
Companies should conduct thorough research into the market and its defciencies before setting
any pricing strategy. Te most efcient approach is to hire a consultant on the ground who can
help you understand the proper pricing.
P
Why
How to
Approach
Too many companies signifcantly 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 fnancially 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
signifcant proportion, if not most of the population in these countries, will be extremely poor
and living outside of the cash economy at a subsistence level.
Te depiction of your target country in a popular entertainment programs or a profle in a fnan-
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 fnancial 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 country’s 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 business’s
operations in the new country. Will you be able to fnd the right employees? Will you be to fnd
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-
(continued on next page)
10
New Economia
Botswana 2010: Business Environment Pre-Entry Due Diligence, continued
In addition to the market research that will be performed, a company will want to also look at
the legal and general business environment. Consider, how efective is the judiciary? Will your
contracts be enforced in a timely manner? You will want to return to your expert to determine
what discrepancies there are between the laws on paper and in practice. What options are there
for alternative dispute resolution? Consider what role the government will play in the future of
the market. Is it a priority for the government’s strategy for the country? Is the opposite true? Do
you expect much interference from the government?
All of these questions and many more should be answered by your company and your consultant.
11
New Economia
MARKETING & DISTRIBUTION
Why
How to
Approach
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. Tey
are infuenced 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 ofend 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 ofend with the advertising, by not
carefully researching what would be acceptable to customers, the company is just as culpable.
Take your cues, frst 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 to
Approach
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. Te 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. Tis 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
12
New Economia
Why
How to
Approach
Poor distribution networks are par for the course in developing countries. Tey are also a major
reason 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, inefcient, and
full of risky or unreliable managers. Although it may be difcult to fnd 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 fnd out which distributors have the best
reputations. Are the distributors providing proper after-sales support? Where you see defciencies
in the distributor’s 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 fnely
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 the
distributor that there should be a key person who will report to your company regularly, prefer-
ably daily. Tese 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. Tis may be an opportunity for you to partner with one or
more of your higher-performing distributors and create the frst network in the area.
Nevertheless, you should handle large and special accounts yourself. Regardless of the efort you
put into developing your distribution network, distributors will not care about your client’s
satisfaction as much as you do.
L .
Botswana 2010: Business Environment
Marketing & Distribution, continued
13
New Economia
TALENT
Why
How to
Approach
In most developing countries the pool of qualifed talent is shallow. With strong demand and
weak supply, recruitment and retention is a battle that companies will fnd 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 ofcials.
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. Te work is too involved to fnd
success without the requisite efort. Recruitment issues improve once the market has been estab-
lished. Universities begin to ofer programs in the feld and training programs allow local talent
to learn new skills from the developed world. You should use locally-based human resource
consultants. Tese are the people who will best know a candidate’s skills for a specifc local
market.
R
Why
How to
Approach
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 may
be used to, poaching is not uncommon, and pay packages are somewhat infated.
Retaining qualifed staf 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 diferences 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 felds. Paying for a manager’s continued education is very common in emerging
markets, as it is benefcial to both sides. Te main goal is to be creative, listen, and be responsive
to your employee’s needs.
Stay on the general good practice of keeping employee satisfaction a priority. Many companies
perform an enhanced schedule of employee satisfaction reviews.
R
14
New Economia
ACQUISITIONS
Why
How to
Approach
Many companies feel that if the market is sufciently developed and there is an appealing target
with measurable upsides, it is easier to enter the market through acquisition and improve the
acquired company’s 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 and
5) restructure the company and integrate it into your regional strategy.
W
Why
How to
Approach
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 infnitely 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. Tere 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 proftably grow our business?
Te answer should be “yes.” If it is not, do not buy. However, to get the answer to that question
you have to fnd the answer to several others frst.
Legal and fnancial audit
A 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. Te organization infor-
D
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New Economia
Botswana 2010: Business Environment Due Diligence, continued
-mation should be fled with the state. If your target business is not registered with the state or
for some other reason is not legitimate, your frst step should be to remedy that immediately. You
will want to obtain all registration papers from the state and copies from the ownership to
confrm 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 country’s laws to determine
contract-assignee’s rights).
You should conduct a similar review of the company’s fnancial statements. For loose accounting
and other reasons you will want to follow up (as much as possible) with the bank to confrm
deposits, retailers and customers to confrm sales, and vendors to confrm purchases. You cannot
aford to take fnancial 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 to
Approach
Most emerging market businesses will require a substantial overhaul if they are to become an
integral and successful part of the buyer’s company. A pressing issue will be productivity and
efciency. Te frst step in integration and upgrading these measures for an acquiring frm usually
involves layofs. Often the acquired frm is bloated and operating far from peak efciency.
Depending on culture and community demands, some acquired frms may own their own kinder-
gartens or operate fre brigades and thus may be overly vertically integrated. Chances are that the
frm has some excesses that it survived with.
A company should look to spin of any parts of the business that are not essential to the function
the acquired company will serve within your organization. Foreign frms that come in, take over
a local frm, and fre a signifcant portion of the staf usually create hefty public relations problems
for themselves. One strategy to consider is to hire a public relations frm, and to create a solid and
visible 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 layofs
for a period of time. Tese 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 confdently those who will stay and those who will not.
R -
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New Economia
Why
How to
Approach
Many developing countries, in an attempt to emulate other country’s success or to empower their
citizens, require foreign frms to partner with a local frm 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. Tey 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 to
Approach
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 efective strategy.
Te Organization of Cooperation and Economic Development’s Convention on Combating
Bribery of Foreign Public Ofcials in International Business Transactions, the US’s Foreign
Corrupt Practices Act, the UK’s Bribery Act 2010, and other laws should serve as an adequate
deterrent to engaging in any corrupt practices. Tese laws prevent you from turning a blind eye
to what your afliates 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 diferentiates between facilitating
payments and bribes. What is written here should not be taken as legal advice. You should consult a
lawyer who can provide complete analysis to your unique situation.
F C P A
Why
How to
Approach
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. Tey 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 sufciently 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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New Economia
Why
How to
Approach
Volatility is a characteristic of emerging markets. Tey are hit disproportionately by crisis. Teir
peaks and troughs are often more severe than in the developed world. Governments are usually
too inexperienced, dispersed, or unstable to be efective.
During a recession companies should fght 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 staf.
Staf recruitment is hard enough, and it would most benefcial to endearing top talent to your
frm by employing them in tough times. You will likely fnd 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.
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Botswana 2010: Business Environment
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