Emerging Markets Strategy Best Practices

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					New Economia   Emerging Markets
               Best Practices
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Table of Contents


             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 De cits                                                       07
             In ation Rates                                                       08
             Interest Rates                                                       09

             M         E        P
             Pro t 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

             Recruitment                                                          14
             Retention                                                            14
Table of Contents

                           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

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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. New
     Economia, 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.

               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 o er 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. 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.

New Economia                                                                             1
                                                                                     Botswana 2010: Business Environment


  A                                ’

  Why             e idea that your company’s past successes in the developed world will automatically transfer to
               the 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,
               unmodi ed 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.

  B E          M

  Why              As signi cant 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 di cult (but not impossible) to
                   persuade consumers to switch brands. ese 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 bene ts 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 di cult 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.

  D     ’

 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 o er 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
               o er similar sustainable growth opportunities. Moreover, these ignored markets will usually
               allow an early entrant to reap higher pro t 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
                                                                                                 Botswana 2010: Business Environment

Avoiding Pitfalls, continued

     S      R                  T

     Why                       A lack of reliable and consistent market information coupled with all types of common uncer-
                               tainties found in emerging markets make it di cult 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                       e best policy is to take a long-term approach to pro ts. ere 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.

      L               D            -M

     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 ts.

     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 pro t 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.

      D      ’

     Why                       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

 New Economia                                                                                                                      3
Avoiding Pitfalls, continued                                                                       Botswana 2010: Business Environment


      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. 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 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 di erences in sensitivity in price and taste. One e ective
     Approach                  approach is to divide your market into several segments and then develop products for all of
                               them. It could be the di erence 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. 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.

 New Economia                                                                                                                        4
                                                                                Botswana 2010: Business Environment



  Why          In emerging markets there is rarely the maturity of economy and development where you would
                 nd 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 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.

  S                   –

  Why          Staying on top of trends – all trends – in your targeted region will signi cantly 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 o cials 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

New Economia                                                                                                       5
                                                                                      Botswana 2010: Business Environment



  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 o either by way
                   of poor data gathering, government boasting, ine cient calculating, or neglect of the under-
                   ground economy. e underground economy in some countries can rival the size of the o cial
                   economy and will thus render any number supplied by the government useless. GDP per capita
                   may actually be $7,900, while o cially it is $4,300. is is a signi cant 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?


  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 gure
                   for businesses, which is also useless – what is important is pro t. 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 gures that you should be looking for almost always are not readily available
  Approach          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.

  B            P

 Why               You want to watch the balance of payments, but especially the current account. A current
                   account de cit 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 pro ts as you convert your earnings

                                                                                                   (continued on next page)

New Economia                                                                                                                  6
Balance of Payments, continued                                                                         Botswana 2010: Business Environment

                             into other currencies. e standard international benchmark is a four percent current account
                             de cit (that is, if the current account de cit 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. e
                             rule of thumb is that reserves should cover at least three months of imports.

                             Another way that the country can bu er a current account de cit 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 de cit, 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 de cit is an indicator of possible currency devaluation as well. ese
                             de cits 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 out ows 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. is 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 in ows. 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.

     B            D

     Why                     A budget de cit occurs when government expenditures exceed its revenue. Governments recon-
                             cile this de ciency 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
Budget De cits, 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 hyperin ation (a vicious circle phenomenon that
                            leads to in ation 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 de cits and trends in government spending.
     Approach               Look to see whether the government is having de cits 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 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 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 o -budget de cit may be. Like companies, governments often use
                            “creative” accounting practices to keep certain matters o of the o cial budget.

     I                R

     Why                    High in ation rates can cut into a company’s pro ts. In ation is tougher to control in small,
                            emerging economies. Where developed countries have entire departments dedicated to in ation
                            targeting within the central bank, developing countries usually do not target in ation. Since so
                            much of the economy is not within their control they simply try to predict and control in ation.
                               e central bank can do this through monetary policy. e government – working indepen-
                            dently – can intervene in the economy to curb in ation where possible.

     How to                 Companies should conduct their own research into in ation. 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 in ation.
                            However, governments that want to show low in ation will sometimes include products
                            supported by government subsidies. e best way to nd out how in ation will a ect your
                            company’s sales is to go directly to the consumer and ask.

 New Economia                                                                                                                       8
                                                                                      Botswana 2010: Business Environment

  I          R

  Why            Interest rates are often manipulated by central banks. is 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 ood of capital to the country as investors chase the highest returns. How-
                 ever, investors will not bring their capital to the country if in ation is too high. In ation 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 in ation 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 in ation.

  How to         Companies should try their best to stay ahead of the curve. If they have been tracking in ation
  Approach       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 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. is 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


  Why          Because companies face such highly competitive environments in the developed world they must
               lower their prices to get sales. Pro t 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. Pro t
               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 de ciencies before setting
  Approach     any pricing strategy. e most e cient approach is to hire a consultant on the ground who can
               help you understand the proper pricing.

  P -

  Why          Too many companies signi cantly 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
               signi cant 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.

                  e depiction of your target country in a popular entertainment programs or a pro le 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.

  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 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?

                                                                                                (continued on next page)

New Economia                                                                                                          10
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 e ective 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


  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. ey
               are in uenced 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 o end 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 o end 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

  B      M

  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. e 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. is 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
                                                                                              Botswana 2010: Business Environment

Marketing & Distribution, continued

     L                                           .

     Why                    Poor distribution networks are par for the course in developing countries. ey 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, ine cient, and
                            full of risky or unreliable managers. Although it may be di cult 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.

     How to                  Be involved: visit warehouses, survey distribution routes, and interview owners. You should check
     Approach                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 de ciencies
                             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 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 the
                             distributor 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 e ort you
                             put into developing your distribution network, distributors will not care about your client’s
                             satisfaction as much as you do.

 New Economia                                                                                                                13


  Why          In most developing countries the pool of quali ed 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 o cials.

  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. e work is too involved to nd
               success without the requisite e ort. Recruitment issues improve once the market has been estab-
               lished. Universities begin to o er 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 candidate’s skills for a speci c local


  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 in ated.

  How to       Retaining quali ed sta 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 di erences 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 manager’s continued education is very common in emerging
               markets, as it is bene cial to both sides. e 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


  Why          Many companies feel that if the market is su ciently 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.


  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 in nitely 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. 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 pro tably 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 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. e organization infor-

                                                                                                 (continued on next page)

New Economia                                                                                                            15
Due Diligence, continued                                                                       Botswana 2010: Business Environment

                           -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 to
                           con rm 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 nancial statements. For loose accounting
                           and other reasons you will want to follow up (as much as possible) with the bank to con rm
                           deposits, retailers and customers to con rm sales, and vendors to con rm purchases. You cannot
                           a ord 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.

      R                                        -

     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
                           e ciency. e rst step in integration and upgrading these measures for an acquiring rm usually
                           involves layo s. Often the acquired rm is bloated and operating far from peak e ciency.
                           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.

     How to                A company should look to spin o any parts of the business that are not essential to the function
     Approach              the acquired company will serve within your organization. Foreign rms that come in, take over
                           a local rm, and re a signi cant 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 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 layo s
                           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 con dently those who will stay and those who will not.

 New Economia                                                                                                                16
  J     V

  Why          Many developing countries, in an attempt to emulate other country’s 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.

  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. ey are prone to friction and
               culture clash. A better option, if available, is always to hire the resources you need.

New Economia                                                                                                     17

  F          C         P            A

  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 e ective strategy.

  How to              e Organization of Cooperation and Economic Development’s Convention on Combating
  Approach         Bribery of Foreign Public O cials 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. ese laws prevent you from turning a blind eye
                   to what your a liates 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 di erentiates 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.


  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. 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 su ciently 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
                                                                                  Botswana 2010: Business Environment


  Why          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 usually
               too inexperienced, dispersed, or unstable to be e ective.

  How to       During a recession companies should ght 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 sta .
               Sta recruitment is hard enough, and it would most bene cial to endearing top talent to your
                 rm 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.

New Economia                                                                                                      19

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