Mikael Orkomies tells us that whilst emerging markets wax and wane in popularity and challenges, the rewards are there for those who mitigate their risk.
Mitigating the Risks and Rewards of Entering Emerging Market
Ten years ago when Excedea started consulting European companies looking to expand to growth markets the usual suspects were Ukraine, Russia and Romania. Coming out of financial crisis, Ukraine had been replaced by Poland and first euphoria of Romania having become an EU member had cooled down. Soon after that it was golden time for investments to Russia. In 2015 the question for those operating in Russia is more how to adjust to the new reality or how to get out while minimizing the losses.
The question that might arise among corporate decision makers is whether the growth markets are worth it with all of their ups and downs; how can a company justify an investment with a longer payback time than what seems to be an average golden period of a growth market? There is no one size fits all answer. For an already multinational company the country risk is divided between several countries but for a small company that may be operating only in 1-2 countries this is not the case.
What is common for both large and small companies is the need to take justified risks. Gradually increasing exposure to the new market by starting with a smaller scale operation and growing the commitment over time is a way to learn what works in the new market. However, often a gradual approach is not possible. For example company acquisition and factory investment are big yes or no decisions. In these cases the associated risk can be lowered by making sure that market understanding is top notch. Needless to say this is what Excedea together with MCJ Lemagnen Associates have done repeatedly.
Another way to lower the risk associated with expansion to a new market is finding someone else to co-finance the expansion. A very convenient way is to have the government as the financer in the form of a grant. This frequently allows reducing the risk by 50-75%. For the purpose of screening, for which public funding opportunities are available, Excedea has created a very popular funding opportunity check service, where the company’s development projects and available funding instruments in national and EU level are matched.
The risk can be further decreased by forming a joint venture with a company or key person in the target market or by inviting an external investor to share the risks and rewards of the market expansion – as long as the low interest rates and money printing era lasts, there is a lot of money looking for its place.
Yet, the best risk mitigation is pragmatic execution. Usually a company entering a new market is in a stage where it already knows how to do its core business well – otherwise it most likely would not be entering the new market, right? If it has studied the market well and concluded that there is demand for its products or services, execution is the only factor separating the company from success. Here again market understanding is a key tool to understand the company’s position in the new market and for creating a winning action plan.
Founding Partner of Excedea Consultants, September 2015
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