Blue Chip Companies in Emerging Markets

Blue chip companies have been around the block a number of times and have weathered the storms, producing goods and services that are tried and true. With new markets emerging in Africa and the Middle East, it’s wise strategy to expand into the markets. Unfortunately, expansion into emerging markets is not as easy as it sounds as blue chip companies face some unique challenges.

Tom Koster, the Commercial Sales Director for Signalhorn, has spent over 20 years in the United Arab Emirate (UAE). His responsibility is to drive business transactions, which includes sales, business development, corporate strategy, and corporate management, across the Middle East and Africa. Tom is known for being able to devise and successfully execute business development strategies for blue chip companies in emerging markets and greenfield settings.

In a recent interview, Koster shared some insights into the difficulties blue chip companies face when entering emerging markets and the pros and cons of greenfield setups.

 

What kinds of difficulties do blue chip companies face when breaking into emerging markets? Are they different from what non-blue chip companies face, and if so, why?

Probably the biggest challenge is the misconception that all markets are the same and that they respond uniformly. Although the Gulf Cooperation Council (GCC) may seem to be a unified business environment, in reality, each country operates independently. Business decision-making in Saudi Arabia will differ greatly from that in Kuwait, in Oman, or in UAE. Businesses must keep this in mind when trying to break into each region.

The second challenge is that blue chip companies have “rigid internal processes and procedures.” This structure may be an advantage in Europe and the United States, but in countries where companies must be flexible and adaptable to changing laws and procedures and different customs, this rigidity becomes a liability rather than an asset. For non-blue chip companies, the problem of rigidity and lengthy protocols may not be an issue.

Based on your years of experience, what recommendations would you make to help blue chip companies that are considering trying to break into emerging markets?

Because the emerging markets are made up of so many different countries and regions, the first thing that any company seeking to enter these areas should do is segmenting the continents or regions into their individual countries. Once that is done, the company should seek to understand the individual countries: the customs, the language, the culture, the mindset, the religion, and any preset biases, etc. Each of these areas can affect how business is done. Businesses need to allow what they know of these areas to dictate how they staff their offices and who they choose for employees within each region. Businesses should “try to find a match in their staffing between the country and their staff.” A final area to keep in mind that Westerners don’t have to think about for the most part is nationality. Many of the emerging markets still have negative associations with different nationalities, so being aware of these associations and choosing employees accordingly is the wise move.

What do you look for in an area that signifies it is a good market for expanding a blue chip company?

The most important element that needs to exist in a potential market is a “stable, business friendly, regulatory environment.” Too much regulation will kill any business, yet an unstable government is also just as harmful. In case disputes arise, potential countries need to have an enforceable legal system that has been proven to be well-regulated and well-implemented so that all parties know they have protection. In addition, businesses need to consider the demographics of the regions. One of the advantages to the Middle East and African markets is that the consumer base is primarily young, 16-34 years of age. These consumers are looking to purchase goods and services rather than expanding homes. As they get better jobs, they need appropriate clothes and supplies, thereby creating demand for goods and services.

Which Middle East and African areas are the up-and-coming areas for blue chip companies?

Great opportunities exist for companies in “conflict zones.” Because these are dangerous areas, before a company enters the market, make sure it has adequate security so that none of its employees’ lives are placed in jeopardy. The other item to consider before deciding on the region is its business environment. How friendly is the environment to the company’s business? Does the country have a welcoming environment for staffing and hiring and firing? Does it have the necessary infrastructure to make traveling in and out of the country easy? Does its banking system allow for capital inflow and outflow?

The areas with the greatest growth potential right now are South Sudan and Libya. Next is Greater East Africa which includes such places as Tanzania, Kenya, Uganda, Rwanda, and Burundi. Zambia is third with West Africa after that. In the Middle East, first up is Saudi Arabia. The smaller Gulf countries are not growing as fast as they once were, but still have potential. Lastly, is Iran, “the last untapped emerging economy.”

Can you share some of the disadvantages and advantages of going with a greenfield strategy? Local distributors?

Since a greenfield setup of entry entails building your own network from the ground up, the primary disadvantage in using it is time. The time spent in developing your distribution chain, making contacts, filling out legal red tape, etc. is time lost in getting your goods or services to the customers. The advantage, though, of a greenfield setup is control. With this setup, the company controls the entire transaction from the beginning to the end. It uses its own processes, staff, pricing, quality assurances, etc. The business knows what it is selling and is confident in the final product.

Choosing to use a local marketing partner or distribution partner also has its own disadvantages and advantages. The primary disadvantage lies in damage to the company’s reputation because of lack of control over the entire process. If the local partner does not perform at the same level the company requires of itself, the company’s reputation may be tarnished within the new country. Secondly, loyalty can be hard to come by. Since the local partner does not have a vested interest in the goods or services, he or she will probably only be loyal as long as a financial advantage exists or some other upside is available.

On the plus side, the local partner has a far deeper knowledge of the area you are trying to enter. He or she knows the laws and unspoken rules and protocols to be followed. He or she knows what works and what doesn’t, what pitfalls to avoid, what challenges the company will face and how to deal with them, and what minefields will have to be crossed. Local partners also have access to client domains that outsiders could never get into. The best way to think of local partners is as “risk reducers.”

If you had no extenuating circumstances to consider, which type of entry strategy would you recommend?

For the emerging market, the best strategy is the local partner. Capitalizing on the partner’s inside knowledge and connections is the wisest course of action and use of resources. If the product or service that your company provides is complex and turning to a local partner doesn’t seem like a good option and you choose to opt for a greenfield strategy because of it, then you need to have spent a lot of time in the territory so that you are comfortable operating there. You want to be sure that a good legal system is in place to protect your business as well.

Do you have any final advice that you would like to share?

These territories, Africa and the Middle East, Africa more in the long term, offer tremendous opportunity for North American companies to offer products and services. They are hungry. They are in many cases leapfrogging technological steps. They will not go with a fixed [phone] line in their houses. Everyone just has cellphones. Because of the changing demographics, there is a huge hunger for energy, education, and healthcare. If there are products and services that work, that have gained a solid traction in the West, in North America, they will shortly market in these territories, but it’s not easy. It’s a very complex market environment.We only hear of the companies that have been successful. For every company that’s successful, there are five companies that have literally fallen on their faces because they didn’t understand the market. Once you veer off course, it’s very hard to right the ship again.

Although blue chip companies face their own sets of difficulties when trying to enter emerging markets, they do not have to “fall on their faces.” Taking the time to research the countries and regions they are looking at entering, matching their staff to the regions, and deciding whether a local partner or a greenfield setup is best will start each venture off on the right foot.