Sure, emerging markets provide opportunities for tremendous growth in business. But companies need to do their homework before going abroad.
By Shelley DuBois, writer-reporter
FORTUNE — Ask just about any CEO about the best growth strategy, and you’ll hear about faraway places. Business leaders, frustrated with sluggish developed markets, are looking abroad for future growth.
This can be a great approach for many companies, as Fortune pointed out last week. But while executives may feel the need to enter emerging markets to grow as fast as investors want, many mistakenly assume that a U.S.-born business plan will succeed abroad.
In fact, an overwhelming majority of companies enter emerging markets without doing their homework before setting up shop in other countries, says Randy Allen, associate dean for international and corporate relations at Cornell’s Johnson School of Management.
Emerging markets may be attractive, but companies looking for an easy growth spurt are getting in over their heads. There are a couple of key points to consider before rushing abroad.
A BRIC imagination
“There is no such thing as BRIC,” says David Martin, an emerging markets specialist with Deloitte Consulting. BRIC, a term coined by Goldman Sachs GS , refers to the pack of countries — Brazil, Russia, India and China — considered ripe for new business.
But BRIC is a false grouping. For one, Russia has been much less exciting to big business since the downturn in 2008. And, in general, countries shouldn’t be clumped together because each requires a distinct strategy. Even within countries, differences between regions make for different markets. The differences between, say, urban and rural areas in China require distinct business plans that take into account everything from consumer preferences to transportation.
While many companies think that making their products cheaper by removing features is the equivalent of tailoring them to emerging markets, Martin says, but they’re wrong. While some markets may demand less expensive products, “you don’t have unsophisticated consumers,” he says, “they know what they’re getting.”
Word is bond?
Like consumer preferences, local legal systems in emerging markets can vary. In the United States, the contract is a strong binding force for businesses. But contract agreements in emerging markets can bend. In many markets, the strength of a deal depends more on a long-lasting relationship than a signed piece of paper, says Benjamin Jones, an associate professor at Northwestern’s Kellogg school of management. Even those relationships can be jeopardized by fluctuations in the political climate.
Enron suffered from this problem (among other things) with its Dabhol power plant in India. In 1992, the company began a $2.9 billion power plant project with the Dabhol Power Company, backed by the Indian government. Starting in 1994, an opposing political candidate ran on an anti-Enron platform, and won, setting off a legal back-and-forth that ultimately forced Enron to pull out of the project.
Companies are also facing difficulties with intellectual property rights abroad. In China, for one, proprietary information is proving hard to protect. Just this past week, Chinese authorities have identified 22 retail outlets in Kunming city copying the the iconic Apple store .
There are a couple of ways that companies are trying to sidestep patent issues, says Jones. One is the same tactic used on the Ford f Model-T assembly-lines: manufacturers build parts of products in different facilities, making them difficult to reverse-engineer. An alternative method is to form partnerships with local companies or governments, Jones says, to “make sure they have some skin in the game.”
You’re not the only show in town
Either way, emerging market consumers and businesses are redefining the terms of engagement with companies from larger economies. Companies looking to slap a Western business model on operations abroad are going to be sorely disappointed.
“Many advanced countries still have a colonial mindset, of ‘we invent here, we commercialize it, and now it’s possible to market it there,'” says Jagdish Sheth, a professor of marketing at Emory University’s Goizueta Business School.
The colonial mindset won’t work anymore. In fact, many countries require multinationals to transform their business models to gain access to their market. Take India, which has tariff laws that make it much easier to import computer components than finished computers, which pressures manufacturers to produce in their country.
Other U.S.-based companies are competing for these markets too. Most big multinationals have already staked their claim. Now, medium-size companies are scrambling not just for a piece of the action, but for talent as well.
For example, one of Deloitte’s clients outlined plans to hire 20,000 Chinese employees over two years. “I’ve talked to three of your competitors,” Martin told the client, “and I’ve read about four others. I can’t tell you there aren’t 20,000 people with the skill set you need, but I can tell you there aren’t 120,000.”
It was a wake-up call, Martin said. For companies who are eyeing overseas expansion, it’s far better to have one of those before you make the leap.
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