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  1. 1. New Economia Emerging Markets Strategy Best Practices
  2. 2. New Economia is a business consulting firm that specializes in emerging markets. We help companiesachieve sustainable growth by capturing unsatisfied demand in emerging markets. For more information,visit us at www.neweconomia.com
  3. 3. Table of Contents 1 Introduction 2 Avoiding Pitfalls 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 5 Market Research Market Intelligence in Emerging Markets Can Often Be Disappointing 05 Stay on the Ground - Stay in Contact with the Market 05 6 Understanding the Economy How Much Can You Trust Numbers? 06 GDP 06 Balance of Payments 06 Budget Deficits 07 Inflation Rates 08 Interest Rates 09 10 Market Entry Preparation Profit Margins are Higher in Emerging Markets 10 Pre-Entry Due Diligence 10 12 Marketing & Distribution Advertising Adaptation 12 Brand Management 12 Local Distribution Channels vs. 13 Creating Your Own Distribution Network 14 Talent Recruitment 14 Retention 14
  4. 4. Table of Contents 15 Acquisitions When Does It Make Sense? 15 Due Diligence 15 Restructuring & Other Post-Acquisition Issues 16 Joint Venture 17 18 Crisis Management, Political Risk & Corruption Foreign Corrupt Practices Act 18 Political Volatility & Government Intervention 18 Weathering the Storm 19 Copyright: All Rights Reserved by New 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. Disclaimer: this document is intended for information purposes only. None of the information in this document should be taken as professional advice. New Economia, and its employees as individuals, are not responsible for actions taken as a result of reading this document. Those wishing to invest in emerging markets should seek professional advice. May we suggest, New Economia.
  5. 5. INTRODUCTION Mature markets in developed countries are often saturated and highly competitive. A few large firms dominate the industry, while smaller, boutique firms operate in niche markets that the larger firms neglect. Market share is mostly determined by marketing tactics and entrench- ment. To find 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 firms now have to compete with other large firms around the world or face elimination. To get an edge, firms are realizing that emerging markets must be an integral part of their long-term global strategy. Emerging markets offer 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. This 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.New Economia 1
  6. 6. Botswana 2010: Business EnvironmentAVOIDING PITFALLS Arrogance in your company’s approach will doom it to failure Why The idea that your company’s past successes in the developed world will automatically transfer to the developing world is flawed. 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, unmodified products will be successful in your chosen emerging market. How to Instead, to be successful in emerging markets, companies must only enter after adequate prepara- Approach 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. Be Early to Market Why As significant 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 difficult (but not impossible) to persuade consumers to switch brands. These opportunities arise quickly and are seized quickly. How to Companies should not wait for outward signs of excess demand before they consider entering Approach a market. By this time it is probably too late to take advantage of benefits of being the only supplier, as other companies will have seen these opportunities as well. They should be follow- ing your leadership. Demand is often difficult 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. Don’t discount smaller markets Why 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 offer great opportu- nities for sustained growth, but so do the SAf (Southern Africa) and ChAP (Chile, Argentina, and Peru) markets. These markets may be smaller in terms of population and GDP, but they offer similar sustainable growth opportunities. Moreover, these ignored markets will usually allow an early entrant to reap higher profit margins as they face less competition. How to It is important not to base your approach on emerging markets on media reports, regardless of Approach 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.New Economia 2
  7. 7. Botswana 2010: Business EnvironmentAvoiding Pitfalls, continued Set Realistic Targets Why A lack of reliable and consistent market information coupled with all types of common uncer- tainties found in emerging markets make it difficult 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. How to The best policy is to take a long-term approach to profits. There is a company learning curve in Approach emerging markets. After consulting experts on the region, set the most realistic annual targets, then budget less than that. Localize Decision-Making Why 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 fits. How to Underinvestment is often a symptom of short-termism. Companies entering emerging markets Approach 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 profit 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. Don’t underestimate local competition Why Local competitors are becoming formidable in a number of markets. They 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. They 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. New Economia 3
  8. 8. Avoiding Pitfalls, continued Botswana 2010: Business Environment Adapt Why 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 simply transplant their pricing structure from the developed world. This approach often leads to failure. Likewise, customers in emerging markets are guided by local customs and culture in their tastes. They are not likely to find 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). How to It is important to always consider differences in sensitivity in price and taste. One effective Approach approach is to divide your market into several segments and then develop products for all of them. It could be the difference 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. This is standard equipment in the developed world and often managers find it hard to understand this reality.This approach is called “strip-down innovation” and is crucial to finding success in emerging markets. Although the example used here is simple, the principle applies across the board to all products, complex and not. New Economia 4
  9. 9. Botswana 2010: Business EnvironmentMARKET RESEARCH Market intelligence in emerging markets can often be disappointing Why In emerging markets there is rarely the maturity of economy and development where you would find 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. How to Here is where it is especially wise to hire an expert who has experience in emerging markets. Approach Primary research is essential. Consulting firms can take a global approach and find out how similar products have done recently regionally, or can test your product in a sub-region of your targeted market. Stay on the ground – stay in contact with the market Why Staying on top of trends – all trends – in your targeted region will significantly increase your chances of accurately predicting the prospects for your product in the future. Having contacts (or hiring a firm 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 officials are much more accessible, especially to those in the business community. How to An excellent source of information about your product and its place in its market is your Approach customers. Your company should have someone on the ground constantly talking to your customers.New Economia 5
  10. 10. Botswana 2010: Business EnvironmentUNDERSTANDING THE ECONOMY How much can you trust numbers? Why 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 off either by way of poor data gathering, government boasting, inefficient calculating, or neglect of the under- ground economy. The underground economy in some countries can rival the size of the official economy and will thus render any number supplied by the government useless. GDP per capita may actually be $7,900, while officially it is $4,300. This is a significant discrepancy that would likely be a major factor in a company’s decision to enter a market. How to Look at trends. Is the per capita GDP trending up? Is the government borrowing more and more Approach money each year? What is the government spending that money on? GDP Why 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 figure for businesses, which is also useless – what is important is profit. 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. How to Unfortunately, the figures that you should be looking for almost always are not readily available Approach in developing countries. These are figures, such as the velocity of money, savings rates, and discretionary spending. Until you can make these figures available to you, it is advisable to improvise. Take the GDP per capita for instance. If you are able to find 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. Balance of Payments Why You want to watch the balance of payments, but especially the current account. A current account deficit 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). This eventually can lead to currency devaluation, which would eat into your profits as you convert your earnings (continued on next page)New Economia 6
  11. 11. Balance of Payments, continued Botswana 2010: Business Environment into other currencies. The standard international benchmark is a four percent current account deficit (that is, if the current account deficit 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. The rule of thumb is that reserves should cover at least three months of imports. Another way that the country can buffer a current account deficit that is more than four percent is if it has a high incidence of foreign direct investment. If investment flows are high or rising and cover a large portion of the deficit, 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 deficit is an indicator of possible currency devaluation as well. These deficits arise from actions that result in a decrease in supply of currency. Hot money is the term for short-term capital movements. These include investments in highly liquid assets such as treasuries and stocks. Sudden outflows of these investments can decrease the supply of foreign currency which can put the currency in danger of devaluation. 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. This 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. How to A company should always look to determine whether the imports that are creating the imbalance Approach are largely consumer goods or capital goods inflows. 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. Budget Deficits Why A budget deficit occurs when government expenditures exceed its revenue. Governments recon- cile this deficiency 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 (continued on next page) New Economia 7
  12. 12. Budget Deficits, continued Botswana 2010: Business Environment 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 hyperinflation (a vicious circle phenomenon that leads to inflation 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. How to Companies should pay close attention to budget deficits and trends in government spending. Approach Look to see whether the government is having deficits 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 fiscal responsibility (it is still a good idea to put this figure 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 off-budget deficit may be. Like companies, governments often use “creative” accounting practices to keep certain matters off of the official budget. Inflation Rates Why High inflation rates can cut into a company’s profits. Inflation is tougher to control in small, emerging economies. Where developed countries have entire departments dedicated to inflation targeting within the central bank, developing countries usually do not target inflation. Since so much of the economy is not within their control they simply try to predict and control inflation. The central bank can do this through monetary policy. The government – working indepen- dently – can intervene in the economy to curb inflation where possible. How to Companies should conduct their own research into inflation. It is important to do your own Approach 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 inflation. However, governments that want to show low inflation will sometimes include products supported by government subsidies. The best way to find out how inflation will affect your company’s sales is to go directly to the consumer and ask. New Economia 8
  13. 13. Botswana 2010: Business Environment Interest Rates Why Interest rates are often manipulated by central banks. This 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 flood of capital to the country as investors chase the highest returns. How- ever, investors will not bring their capital to the country if inflation is too high. Inflation 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 inflation is higher than the nominal interest rate, then the real interest rate can actually be negative. This can lead to a flight of capital – which increases interest rates – until interest rates rise to a level above inflation. How to Companies should try their best to stay ahead of the curve. If they have been tracking inflation Approach on their own, they will have an idea of the real interest rate. They 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. This is important because it may not be what compa- nies expect as it is the opposite of what happens in developed markets.New Economia 9
  14. 14. MARKET ENTRY PREPARATION Profit margins are higher in emerging markets Why Because companies face such highly competitive environments in the developed world they must lower their prices to get sales. Profit 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. Profit margins, of course, depend on product cost, which can be controlled through local sourcing. How to Companies should conduct thorough research into the market and its deficiencies before setting Approach any pricing strategy. The most efficient approach is to hire a consultant on the ground who can help you understand the proper pricing. Pre-entry due diligence Why Too many companies significantly 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 financially 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 significant 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. The depiction of your target country in a popular entertainment programs or a profile in a finan- 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 financial maga- zines. It would be an understatement to say that conditions in emerging markets change frequently and at a rapid pace. How to Your company should conduct its due diligence in tandem with an experienced expert in your Approach 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 find the right employees? Will you be to find 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? (continued on next page)New Economia 10
  15. 15. Pre-Entry Due Diligence, continued Botswana 2010: Business Environment 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 effective 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. New Economia 11
  16. 16. MARKETING & DISTRIBUTION Advertising adaptation Why 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. They are influenced 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. How to It is crucial that companies pay close attention to the culture of the country they are entering and Approach are careful not to offend 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 offend with the advertising, by not carefully researching what would be acceptable to customers, the company is just as culpable. Take your cues, first 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. Brand Management Why 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. The point is that you should know what you are facing in terms of recognition when entering a market. How to Most likely you will have to build your brand from scratch when entering a market. This can Approach 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.New Economia 12
  17. 17. Botswana 2010: Business EnvironmentMarketing & Distribution, continued Local distribution channels vs. creating your own distribution network Why Poor distribution networks are par for the course in developing countries. They 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, inefficient, and full of risky or unreliable managers. Although it may be difficult to find 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. How to Be involved: visit warehouses, survey distribution routes, and interview owners. You should check Approach the relationship that distributors have with retailors to find out which distributors have the best reputations. Are the distributors providing proper after-sales support? Where you see deficiencies 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 finely 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. These 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. This may be an opportunity for you to partner with one or more of your higher-performing distributors and create the first network in the area. Nevertheless, you should handle large and special accounts yourself. Regardless of the effort you put into developing your distribution network, distributors will not care about your client’s satisfaction as much as you do. New Economia 13
  18. 18. TALENT Recruitment Why In most developing countries the pool of qualified talent is shallow. With strong demand and weak supply, recruitment and retention is a battle that companies will find 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 officials. How to If you must hire an expatriate, look for employees with international exposure and a passion for Approach 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. The work is too involved to find success without the requisite effort. Recruitment issues improve once the market has been estab- lished. Universities begin to offer programs in the field and training programs allow local talent to learn new skills from the developed world. You should use locally-based human resource consultants. These are the people who will best know a candidate’s skills for a specific local market. Retention Why 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 inflated. How to Retaining qualified staff in the developing world often means paying more for talent Approach (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 differences 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 fields. Paying for a manager’s continued education is very common in emerging markets, as it is beneficial to both sides. The 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.New Economia 14
  19. 19. ACQUISITIONS When does it make sense Why Many companies feel that if the market is sufficiently 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. How to You should consider buying a local company whenever it is determined that the target company Approach 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. Due diligence Why 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 infinitely important in making acquisitions work. It is estimated that more than half of all acquisitions fail to add value. How to Due diligence is meant to uncover all details of a company – if done properly, there will be no Approach 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. There 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 profitably grow our business? The answer should be “yes.” If it is not, do not buy. However, to get the answer to that question you have to find the answer to several others first. Legal and financial 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. The organization infor- (continued on next page)New Economia 15
  20. 20. Due Diligence, continued Botswana 2010: Business Environment -mation should be filed with the state. If your target business is not registered with the state or for some other reason is not legitimate, your first step should be to remedy that immediately. You will want to obtain all registration papers from the state and copies from the ownership to confirm 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 financial statements. For loose accounting and other reasons you will want to follow up (as much as possible) with the bank to confirm deposits, retailers and customers to confirm sales, and vendors to confirm purchases. You cannot afford to take financial 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. Restructuring and other post-acquisition issues Why 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 efficiency. The first step in integration and upgrading these measures for an acquiring firm usually involves layoffs. Often the acquired firm is bloated and operating far from peak efficiency. Depending on culture and community demands, some acquired firms may own their own kinder- gartens or operate fire brigades and thus may be overly vertically integrated. Chances are that the firm has some excesses that it survived with. How to A company should look to spin off any parts of the business that are not essential to the function Approach the acquired company will serve within your organization. Foreign firms that come in, take over a local firm, and fire a significant portion of the staff usually create hefty public relations problems for themselves. One strategy to consider is to hire a public relations firm, 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 layoffs for a period of time. These 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 confidently those who will stay and those who will not. New Economia 16
  21. 21. Joint Venture Why Many developing countries, in an attempt to emulate other country’s success or to empower their citizens, require foreign firms to partner with a local firm in order to obtain licenses to operate. It is a development strategy used by various countries, both developed and developing. How to You should consider joint ventures as an option only if you must. Surveys have shown that over Approach a ten-year period, less than 20 percent of joint ventures survive. They are prone to friction and culture clash. A better option, if available, is always to hire the resources you need.New Economia 17
  22. 22. CRISIS MANAGEMENT,POLITICAL RISK & CORRUPTION Foreign Corrupt Practices Act 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 effective strategy. How to The Organization of Cooperation and Economic Development’s Convention on Combating Approach Bribery of Foreign Public Officials 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. These laws prevent you from turning a blind eye to what your affiliates 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 differentiates 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. Political volatility and government intervention Why 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. They 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 sufficiently independent, and law enforcement agencies may discriminate in the cases they decide to pursue. How to Carry an amount of skepticism when dealing with governments and have a “Plan B” available Approach 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.New Economia 18
  23. 23. Botswana 2010: Business Environment Weathering the storm Why Volatility is a characteristic of emerging markets. They are hit disproportionately by crisis. Their peaks and troughs are often more severe than in the developed world. Governments are usually too inexperienced, dispersed, or unstable to be effective. How to During a recession companies should fight the inclination to pack up and leave. Emerging Approach 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 staff. Staff recruitment is hard enough, and it would most beneficial to endearing top talent to your firm by employing them in tough times. You will likely find 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.New Economia 19