Emerging or so called “Growth” markets are high risk but have the opportunity to offer great returns. It is estimated that 90% of international arbitrations relate to contract disputes between private parties and the rest involve suing countries! Both of these types of arbitrations are expensive, time consuming and difficult to collect according to the Economist. So it will be interesting to see how Russia manages the (non) payment of $50 billion to the Yukos shareholders for breaching the energy treaty in 2006 when it seized the assets of Yukos. Big MNCs have the clout to mange the legal wrangling across countries and lobby political bodies. What can a small SME do? Why are negotiating skills important especially when drawing up contracts? What are the legal boundaries of acceptable risk an SME is willing to accept? This article discusses a few points.
Managing Government Contracts: Government contracts seem more secure than private ones especially in markets that are volatile and where the legal infrastructure is developing. Many markets are encouraging SMEs to bid for contracts and even implementing a quota system (Example UAE, Australia). Traditionally, in emerging markets, the lack of knowledge and the political uncertainty were key risks affecting western businesses, this now extends to the murky world of illegal bribes according to an ACCA Global report. Risks nowadays also focus on renegotiation or breach of contracts. A recent HBR article concludes that the ability to renegotiate is key to surviving the political upheaval in these markets.
Managing Working Capital: A recent Bacs Payment Schemes study in UK found that SMEs there faced an average of £38,186 per firm in unpaid invoices. According to 25% of those SMEs surveyed, £50,000, was enough to close business. So SMEs need both soft and hard skills to negotiate settlements and collect dues. So while in the west, the business environment is different, in markets like UAE, a bounced check does not lead to a lower credit rating, it leads to jail and may eliminate all possibilities of collecting debt (especially if the party fees from the country rather than face jail time).
Protecting your Competitive Advantage: Building organically means an SME must be able to protect its Intellectual Property (IP). The biggest losses in IP often come from employees or other trusted stakeholders who have access to knowledge that is not secured. SMEs don’t have the capital to invest in legal resources or technology resources to protect organisation information. In many emerging markets, business requires strong networking (wasta in Middle East or guanxi in China) and this means you need to trust “partners” without formal agreements as a show of good faith. SMEs need to invest in hiring and training. More importantly they need to have a plan that can terminate relationships but also safeguard their proprietary knowledge.
In addition to this, SMEs need to keep an eye on new technology like 3D printing which is estimated to result in a loss of $100Bn pa in IP according to Gartner. This concept by 2016, will also extend to bio printing (3D printing of tissues and organs). No industry is safe.
Counterfeiting is another issue which can result in loss of revenue. Sketchers in 2010, a leader in casual sneakers introduced Bobs, which was similar to Toms (see more). To build a market, SMEs need to negotiate boundaries and be tough about what is acceptable and not. If you don’t fight you lose.
Scaling Responsibly and Safely: One of the fastest ways to scale is through strategic alliances. When in doubt think Apple. The iPhone was a revolutionary product, but what made it a gamechanger was the App Store. This was a stockpile of third party designed apps (“there’s an app for that”) which ensured that the customer had choice with a quality that only Apple could give. Apple kept control on standards and allowed the customer the flexibility to customize his IPhone, IPad or Mac. The organisation control is important, big firms like Google can also get in hot water. Recently they needed to pull out an app “Bomb Gaza” after public outcry.
Franchising and Licensing are other ways to grow rapidly especially in new territories! But there are precautions. The landmark ruling in the case of McDonalds where the MNC is responsible for the workers of its franchisees shows this is an area you need to be cautious in, especially as emerging markets are becoming more globally connected and savvy of global rights. Secondly, currency value in these markets fluctuates and political volatility may mean funds cannot be taken out of the country (loss of payment). The sanctions against Russia are a great example.
The recent case of managing the China supply chain for fast food giants Yum! Restaurants and McDonalds all bring to fore the worry franchise management can have if not tightly controlled. In the Middle East, many franchisee contracts were written up in perpertuity as western companies did not ever think there would be a time that these markets would become central to business. These contracts are difficult to renegotiate. All strategic alliances should have contracts with detailed responsibilities, obligations, value and exits clauses.
Negotiations are a function of culture and this can not be forgotten. Firm values are key for future growth so SMEs need to define their operational and value boundaries.