BUSINESS SPECIAL ..Does Business Get Done the Same Way in Emerging and Developed Countries?

Does Business Get Done the Same Way in Emerging and Developed Countries?

Leaders of two prominent business enterprises in Turkey, Rahim M. Koç and Hamdi Akin, discuss the advantages and challenges of being entrepreneurs in an emerging economy with Professor Felix Oberholzer-Gee.

On September 12, 1980, the military launched a coup on the government in Turkey. For many executives, such instability is the worst nightmare of doing business in a developing country. But for Turkish entrepreneur Hamdi Akin, usually on the outside looking in, suddenly the business playing field was level, and he took advantage. Eventually he would build Akfen Holding, today one of the biggest infrastructure construction and operations companies.

“As an outsider in the previous era, this was a fantastic opportunity,” says Felix Oberholzer-Gee, the Andreas Andresen Professor of Business Administration in the Strategy unit at Harvard Business School. “No one had relationships with the parliamentarians—he built his business in part around this opportunity.”

This idea that political or economic turmoil creates both business destruction and opportunity is one of a series of insights emerging for readers of recent HBS interviews with two prominent Turkish business leaders: Hamdi Akın, chairman of Akfen Holding and Rahim M. Koç, honorary chairman, Koç Holding.

The companies these men led during terrific growth phases are similar in some ways, but very different in others.

With $30 billion in revenue, The Koç Group is the largest conglomerate in Turkey, with more than 100 companies and 73,000 employees operating in the consumer products, financial services, and energy industries. It was started in Istanbul by Rahmi’s father, Vehbi Koç, in 1926, and expanded while Turkey was largely a closed economy. Although it employs professional managers, members of the family remain very influential. In fact, as Koç explains in his interview, the business believes in becoming involved in the family affairs of its most senior executives, family or not.

Akfen Holding, founded 50 years after Koç in Ankara, holds a variety of construction, engineering and other firms related to infrastructure development. It has about 36,000 employees. The company is publicly traded, but controlling shares are held by the family. While Akın is the founder and chairman, the family is not involved in the day-to-day operations of the business.

The interviews are part of a growing collection with business leaders in developing countries. The Creating Emerging Markets project is sponsored by Harvard Business School’s Business History Initiative.

We spoke with Oberholzer-Gee, who conducted both interviews in early 2015, to discuss the differences and similarities of starting, managing, and leading businesses in emerging markets.

Sean Silverthorne: When we think of developing economies or countries, instability is often seen as a negative. Should you build a business in a place where the rule of law is suspect? But Hamdi Akın seemed to have thrived in the political turmoil in Turkey.

Felix Oberholzer Gee: Creative destruction is an old idea, going back at least to Schumpeter. We typically associate it with entrepreneurship. Someone has a brilliant new idea, everyone is excited and the entrepreneur and his customers are much better off. But, in the meantime, someone else’s capital probably gets undermined. Creative destruction of a different kind occurred during the political transition in Turkey in 1980, after the military coup. Previous political and social connections lost their value over night. 450 new people sat in parliament, and none of them had a long history as a politician.

You might see this as a huge loss of capital. And, in fact, a lot of knowledge was lost in that transition. Many people had to figure out new things, had to learn how to operate under difficult circumstances. But for Akın, who was as an outsider in the previous era, this was a fantastic opportunity. No one had relationships with the parliamentarians--he built his business in part around this opportunity.

Many academics emphasize the benefits of stability. When we see wobbly political regimes or uncertainty in the law, we assume it is detrimental to business. We favor stable situations and long time horizons that allow executives to make investments. Turkey’s example provides a richer view: Yes, the change to a military regime undermines social capital and the rule of law. But, at the same time, the disruption is an opportunity for outsiders who found it more difficult to build businesses under the old regime.

Q: So how does the relationship between business and government differ in developing nations versus developed nations?

A: I don’t how different it is. We like black and white, so we like to think of the US economy as market driven, and think of these emerging markets as the government being everywhere, as having an outsized influence. Frankly, I think there is more gray than black and white.

For a very large group like Koç, government relations are critical because many of the big business opportunities touch politics. Can you become involved in energy without having a really tight relationship with the government? Probably not. We recently wrote a case on Turkcell, the leading telecom operator. For this type of business, it is not surprising that the executive in charge of government relations is part of the inner circle.

You can look at Turkcell and see it as a typical emerging-market story. Government intervention is everywhere. Regulators even set prices, service by service. The competition is tightly managed. But how different is this from mature markets. Who decides whether you can buy T Mobile? The U.S. Department of Justice. Who decided it was a good idea to send consumers a text message before they exceeded data limits on their cell phones? The Federal Communications Commission.

But there are differences, of course. Emerging market governments have little hesitation to treat companies in an unequal fashion. In the cell phone market, the Turkish government sets both minimum and maximum prices. And the prices set for Turkcell are different than those for Turkcell’s competitors. That’s the kind of regulation you are less likely to see in mature markets because the legal system and independent courts pressure government to be even handed.

Q: Are there common traits among successful leaders in emerging markets? Are the executive skillsets they need to succeed fundamentally different than what we see in more mature economies?

A: In many emerging markets, superior execution can be the source of astonishing success. The Koç group has a very successful white goods business. You look at it and ask, what is the source of the success? Are they doing something completely unheard of? The answer, I think, is incremental improvement and stellar execution.

People who know how to build and run a really solid business can be super successful even without a truly novel idea. What gets the business started is not the novelty of the products. It’s understanding how you build local distribution, how you go from building washing machines that have relatively low quality to washing machines that have decent quality. It is not rocket science. Many people had the necessary capability, but only a few saw the opportunities and said, OK, I’m going to do it.

While this pattern of success is common, it would be a mistake to think that emerging markets are simply versions of earlier markets that are now mature. I think what is almost always true of emerging markets is that there are islands of modernity where emerging markets are way ahead, and then there are islands where they are clearly backward.

Q: Both companies have had success globalizing their businesses, but Koç also describes the uphill battle companies in emerging countries face in trading with developed nations, which tend to do business with each other. In his interview with you he says, “It is not easy in this global world. Competition is very, very tough, even merciless. The mother companies in other markets are very strong. They can afford to lose ten years in order to get control of one market.”

A: The Koç Group has had some remarkable successes in globalizing the group. At the same time it has remained a more Turkish group than one might have expected. Rahmi Koç makes a good point when he explains how hard it is to break into mature markets, particularly if you don’t have a well-known brand or reputation. Some Turkish companies bought old brands to overcome this barrier.

For example, Koç bought the Grundig brand in Germany. Grundig was famous for its radios and televisions. But Koç expanded the scope of the brand to include white goods also. That’s an attempt to break into markets that are firmly dominated by companies that have good reputations. Why would a Turkish business (Yildiz Holding) buy Godiva? It’s not so much that Godiva makes chocolate like no one else can. It’s that people trust the name.

In markets with significant scope for differentiation, it’s easier to join the leading companies that dominate world trade. But if you are in white goods, it is all incremental improvement and operational effectiveness. And brands loom large. The importance of operational effectiveness makes it easier to build domestic capacity, but then makes it really hard to break into Western European or North American markets. Not impossible—think LG, think Samsung—but expensive and challenging.

Q: Especially in your interview with Koç, it was clear he considered his firm’s reputation to be of extreme importance. I’m not sure you would hear western executives put as much emphasis on reputation for their success as other qualities. Or am I over-stating that?

A: Possibly. It is not hard to think of businesses in mature markets whose main asset is reputation. And the loss of reputation can be devastating, think of Volkswagen’s current crisis, for example. But you are right in the sense that the value of reputation increases in business environments with greater uncertainty. Looking at the large business groups in Turkey, you might wonder why all these businesses are under one roof. What’s common across energy, washing machines, and cars? One answer might be that the resource you have is the reputation of the group. If you enter a new business, say financial services, why should someone trust you? In part, your advantage might come from tangible assets such as capital or access to talent inside the group. Equally important, I believe, is reputation, knowing that it is Koç or Akfen.

Q: Koç and Akfen are both family owned. Is this an advantage?

A: One idea is that family firms have longer time horizons, that they are less susceptible to short-term pressures. There is some empirical evidence that family firms can make decisions that are longer-term oriented, but the evidence is not clear cut. And there can be significant drawbacks to having families manage a business. My colleague Raffaella Sadun has done fascinating research in which she documents that family-run firms often fail to introduce management techniques that are closely linked to better financial performance. So it’s at least an open question whether being a family firm is an advantage.

The Koç solution, which I find quite fascinating, is to say that day-to-day operations are firmly in the hands of professional managers who are brought in from the outside. As Rahmi Koç explains in the interview, it takes the managers a long time to earn their stripes. Patience avoids some of the tensions of the (pure) family-run business. On the one hand you have a larger pool to pick talent from, but by the time you get to positions of real responsibility, the fact is you are almost joined at the hip with the family.

Q: Koç makes a point that the company has no hesitation about becoming involved in the personal lives of senior executives, even the non-family employees.

A: Yes, you are the professional coming in but we are extending the relationship—we are hanging out with your family, we’re all going to picnics, and so on. It feels a little like you are a cousin or nephew. There are parallels in publicly traded US companies. Sam Walton was famous for having early Saturday morning meetings. Business was first, but the families were all there as well. Saturdays were business and family affairs.

Q: Why has governance evolved that way among some of these firms?

A: It is smart management in good part. They see the trade-offs and know they can’t be an old-fashioned classic family firm in an environment that is increasingly competitive and requires them to be efficient.

Organizational structure was less important when Turkey was cut off from the rest of the world. All you needed was an attractive import license, and you were (almost) set for life. Now it’s a competitive game, now you have global opportunities. Being a family firm has mixed consequences for performance. Many of the practices in large Turkish business groups—the way they promote, the way they get engaged with personal matters and family life—balance these two forces.

Q: What can readers of these interviews learn about running or improving themselves or their organizations?

A: The first thing that struck me is the very many respects that business in emerging markets is just business. In a way, that is the essence of global management. A thousand things change completely as you go from one market to another, and a thousand things stay exactly the same. The difficulty is in knowing which is which—what needs to change, what can stay the same.

Some executives with little experience in emerging markets expect them to be radically different. This is the wrong impression.

Conducting the interviews, I walked away deeply impressed by the managerial capacity in emerging markets. The domestic firms are very, very capable. Yes, they operate under particular constraints—we do not see the many middle managers typical for more mature markets; there aren’t the sophisticated capital markets that we are used to—but in many other dimensions, as you hear the executives talk about their businesses and how they think about their sources of competitive advantage, it’s not so different from what you would hear in European and North American boardrooms.

.        by Sean Silverthorne

http://hbswk.hbs.edu/item/is-doing-business-in-emerging-economies-different-than-in-developed-nations