New Economia Emerging Markets

Strategy
Best Practices
New Economia is a business consulting firm that specializes in emerging markets. We help companies
achieve sustainable growth by capturing unsatisfied demand in emerging markets. For more information,
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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
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

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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. Those wishing to invest in emerging
markets should seek professional advice. May we suggest, New Economia.
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.

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 Botswana 2010: Business Environment

AVOIDING 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.

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 Botswana 2010: Business Environment

Avoiding 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.

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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.

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 Botswana 2010: Business Environment

MARKET 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.

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 Botswana 2010: Business Environment

UNDERSTANDING 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

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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

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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.

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 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
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?

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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
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
 Botswana 2010: Business Environment

Marketing & 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
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
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-

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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
 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
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
 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