STRATEGY & EMERGING

MARKETS (IBUS3109):
EXPLOITING EMs:
LESSONS FROM
BUSINESS GROUPS

S2, 2023
Presented by
Dr. Sangeeta Ray
Faculty of Business
Discipline of International
Business

The University of Sydney Page 1

 AGENDA

LESSONS FROM BUSINESS GROUPS

– HOW DID BUSINESS GROUPS SUCCEED DESPITE

INSTITUTIONAL WEAKNESSES/ VOIDS

– CAN THEIR SUCCESS BE ATTRIBUTED TO THEIR DISTINCTIVE

FEATURES?

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 THE QUICK RECAP

– Institutional voids in Emerging Markets constitute the challenges

that firms need to respond to…
– Examples,
• Absence of specialised intermediaries, such as, regulatory
systems and contract enforcing mechanisms

BUT BUSINESS GROUPS HAVE FLOURISHED IN EMERGING

MARKETS DESPITE INSTITUTIONAL VOIDS

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 LESSONS FROM BUSINESS GROUPS

– HOW DID BUSINESS GROUPS SUCCEED DESPITE

INSTITUTIONAL WEAKNESSES/VOIDS

– CAN THEIR SUCCESS BE ATTRIBUTED TO THEIR DISTINCTIVE

FEATURES?

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 TATA: AN INDIAN BUSINESS GROUP
A new kind of global company is on the rise: diversified multinationals
from emerging markets (Source: Economist, March 3 2011)

What explains the sustainable growth of Tata?

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 BUSINESS GROUPS: UBIQUITOUS IN EMs

Also referred to as
Grupos in Brazil/ Latin America
– (eg. RBS, Folha, Abril, EBX, Pao de Acucar)

Business Houses in India

– (eg Tatas, Birlas, Piramal, Ambanis, RPG)

Chaebols in S. Korea
– (Samsung, LG, Hyundai, Daewoo, SK)

Keiretsu in Japan
– (Mitsui, Mitsubishi, Sumitomo, Yasuda)
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 BUSINESS GROUPS IN EMs

Other Business Groups in Emerging Markets

– Indonesia (eg. Astra International, Salim group)
– Thailand (eg. CP group)
– Turkey (eg. Koc, Sabanci)
– Singapore (eg. Temasek)

– More recently in
– Russia – Financial Industrial Groups (FIGs)
– China – Government is encouraging development Business Groups

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 BUSINESS GROUPS – SIGNIFICANCE?

– Predominant form of ‘Organization’ in emerging market economies

– Deeply woven into the social and economic fabric of most

emerging economies

– Many of the largest emerging market firms affiliated to business

groups

– Have a varying degree of participation by foreign investors

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 BUSINESS GROUPS: DEFINING CHARACTERTISTICS
Business Groups – Defining Characteristics?

– Affiliate members are legally independent

– Usually diversified - operating in very different industries

– Interconnected by economic and social ties

– Coordinated through a central administrative unit

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 Market capitalisation of Tata companies as on March 16,
2017
•Aggregate market capitalisation: Rs 864,624 crores / US$ 132.2 bn

•Most valuable business Group

•7.2% of Bombay Stock Exchange's total market capitalisation
•4.1 mn shareholders

Note: Exchange rate $ = Rs 65.41

Name of the company Rs Cr $ billion

TCS 496,341 75.88
Tata Motors 138,701 21.20
Tata Steel 48,478 7.41
Titan Company 41,309 6.32
Tata Power 23,261 3.56
Tata Motors (DVR) 14,867 2.27
Tata Communications 22,126 3.38
Tata Chemicals 14,787 2.26
Tata Global Beverages 9,129 1.40
Voltas 12,905 1.97
Indian Hotels 12,044 1.84
Trent 8,115 1.24
Rallis 4,765 0.73
Tata Investment Corporation 3,499 0.53
Tata Elxsi 4,501 0.69
Tata Coffee 2,299 0.35
Tata Teleservices (Maharashtra) 1,685 0.26
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 DIVERSIFIED CONGLOMERATE
HEADQUARTERS

Product Product Product Product

Group/ Group/ Group/ Group/
Division A Division B Division C Division D

Purchasin Manufacturing Marketing Finance

g

Buying Units Plants Branch Sales Units Accting. Units

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Business groups in Indian Corporate
Sector
•HOW ARE BUSINESS GROUPS OWNED ?
•Business groups are controlled through cross (circular)
shareholding

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 BUSINESS GROUPS – COMMON FEATURES

Group structure
– Often Highly Diversified
– Vertically integrated – High volume of Intra-Group trade (i.e.
buyer- supplier relationships between group affiliates)

Group ownership & control

– Mostly Family owned & controlled
• Single family (eg Tatas, Samsung, Daewoo, Salim)
• Multiple families (eg Koc & Sabanci of Turkey)

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 BUSINESS GROUPS – COMMON FEATURES

Group ownership & control contd.

– Common owner
– Director interlocks
– (The same individuals are involved in multiple companies through
ownership stakes i.e. holding major stakes in a group’s constituent
firms and also through board positions
– Equity cross holdings
Government support & control
– Most Business groups have relied on government support
(Protection from foreign investment, access to capital, preferential
treatment - subsidies)
(eg. Govt controls Temasek Grp –Singapore Airlines)
– Limited Govt control in Russian FIG

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 EVOLUTION OF THE TATA GROUP

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 Evolution of the Samsung Group

Founder: Byung-Chull Lee

1938: Dried Noodles, Fish, Veg
1969: Electronics

http://www.samsung.com/us/aboutsamsung/corporateprofile/history06.html

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 BUSINESS GROUPS : COMPETITVE ADVANTAGES?
– Large - enjoy economies of scale & scope

– Diversified - enables spreading risk over multiple industries

– High ROA – deep pockets

– Established brand names/ reputation for quality products &

services in domestic market

– Strong political connections and relationship networks with

government officials and bureaucrats

– Reputation for reliability, honesty and integrity (eg respecting

property rights, honoring promises)
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 BUSINESS GROUPS & INSTITUTIONAL VOIDS

– HOW DID GROUPS SUCCEED DESPITE INSTITUTIONAL

WEAKNESSES/ VOIDS

– WHY CAN BUSINESS GROUPS NAVIGATE SUCCESSFULLY

THROUGH INSTITUTIONAL VOIDS ?

– CAN THEIR SUCCESS BE ATTRIBUTED TO THEIR DISTINCTIVE

FEATURES?

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 TATA BRANDS

– http://www.tata.com/brandshowcase.html

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 Market
Structures

Source: “Emerging Giants, Building World-Class Companies in

The University of Sydney Developing Countries” Khanna & Palepu, 2006 Page 23
 ECONOMIC TIES IN GROUPS & INSTITUTIONAL VOIDS

CAN THEIR SUCCESS BE ATTRIBUTED TO THEIR DISTINCTIVE

FEATURES?
In environments with high TCs, risks of opportunism

ECONOMIC TIES THAT REDUCE TRANSACTION COSTS

1. Direct Equity Holdings
– (eg. equity crossholding i.e. member firms may hold equity stakes in
each other, creates a situation of mututal exchange of hostages)

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 ECONOMIC TIES IN GROUPS & INSTITUTIONAL VOIDS

ECONOMIC TIES THAT REDUCE TRANSACTION COSTS (contd.)

2. Common ownership and Director Interlocks (The same individuals
are involved in multiple companies through ownership stakes i.e. holding
major stakes in a group’s constituent firms and also through board
positions

REDUCTION OF TCs BY
– Facilitating information flows between firms (increasing awareness
regarding opportunities for exchange, timely access to strategic info.)
– Promoting Alignment of firm interests - reduces fear of
opportunism
– Fostering common identity within a group – increases cohesiveness

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 SOCIAL TIES IN GROUPS & INSTITUTIONAL VOIDS
Social Ties in the form of family connections among member firms of a
group is very common
Family ties within BGs serve a functional purpose in uncertain
environments:
1. Promote alignment of interests & goal congruence among group
members which mitigates opportunistic behavior
2. Reliability and stability associated with family relationship
guarantee repeated social contact among individuals in a group
– reinforces recurring patterns of exchange/ repeated trade with
same partners
– enables flow of information between firms regarding
opportunities for exchange or new ventures
– Facilitates the development of trust and enable smooth
coordination among companies belonging to a group.
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 FILLING INSTITUTIONAL VOIDS : CAPITAL MARKETS

HOW DO BUSINESS GROUPS FILL INSTITUTIONAL VOIDS

IN CAPITAL MARKETS: (eg. lack of reliable information, inadequate
safeguards to protect investors)

Business Groups serve as specialised intermediaries

– Act as internal capital markets to raise funds
– Act as lending institutions to existing member firms
– Provide finance to suppliers and customers
– Provide capital infusions (risk sharing) to support weak performing
member firms
– Act as venture capitalist – provide start-up capital for new ventures

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 FILLING INSTITUTIONAL VOIDS: CAPITAL MARKETS

HOW DO BUSINESS GROUPS FILL INSTITUTIONAL VOIDS

IN CAPITAL MARKETS: contd

– Act as conduits for large foreign investments

• Foreign investors trust groups to evaluate/ assess new
opportunities and exercise an auditing and supervisory
function
– Nurture New Ventures/ Entrepreneurship
– endorse new ventures with group name and reputation in
exchange for equity stake

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 FILLING INSTITUTIONAL VOIDS: LABOR MARKETS
HOW DO BUSINESS GROUPS FILL INSTITUTIONAL VOIDS
IN LABOR MARKETS: (eg. scarcity of trained managers, lack of
vocational training, rigidity of labor markets)
Business Groups can develop extensive internal labor markets by
– In-house training of locally recruited talent: invest in dedicated
facilities for internal Professional Development programs geared
towards developing skills of experienced managers
Eg.Tata Group provides both management education and a
certification service of talent recruited locally.Tata Administrative
Services (TAS) – an in-house training program with a national reputation
for excellence aimed to create a cadre of general managers.
Eg Korean Chaebols – set up special programs in collaboration with
top U.S. business schools in order to train their own people.
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 FILLING INSTITUTIONAL VOIDS: LABOR MARKETS

Rigidity of the labor markets – Governments & laws make it difficult

for companies to adjust their workforce to changing economic conditions.

– Due to its internal labour markets

– Employees transferred from a company facing declining
prospects to other companies within the group that are on the
rise.
– Groups allocate talent to where it is needed which gives them a
head start in beginning new activities (Eg. Wipro)
– Trained employees and managers are willing to relocate to even
undesirable locations (Eg Aditya Birla)

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 FILLING INSTITUTIONAL VOIDS: PRODUCT MARKETS
HOW DO BUSINESS GROUPS FILL INSTITUTIONAL VOIDS
IN PRODUCT MARKETS: (lack of reliable information on product
quality, missing specialized intermediaries eg for certification of quality,
difficult to build credible brands, lack access to advanced technologies/
technical know-how)
– Groups leverage their reputation for quality products & services
and use their group name to enter new businesses/ to extend
product/ service offerings.
– (eg Korean chaebols extend group identity over multiple product
categories. Samsung uses it name for a range of goods – TVs to
microwave ovens)
– Groups leverage their reputation for reliability, integrity, honest
dealings, protection of property rights to attract specialized
suppliers of components/ foreign partners for advanced
technologies
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 FILLING INSTITUTIONAL VOIDS: PRODUCT MARKETS

HOW DO BUSINESS GROUPS FILL INSTITUTIONAL VOIDS

IN INTERMEDIATE PRODUCT MARKETS: (weaknesses in supply chains)

– Act as internal markets for intermediate products

– Intra-group trade between member firms enables an internal,
reliable supply chains
– eg member A may be the supplier of raw materials &
components required by member B for manufacture of a final
product
– Steel supplier : Tata Steel Buyer : Tata Motors, Titan watches

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 FILLING INSTITUTIONAL VOIDS: PRODUCT MARKETS

HOW DO BUSINESS GROUPS FILL INSTITUTIONAL VOIDS

IN INTERMEDIATE PRODUCT MARKETS: (weaknesses in supply chains)

– Leverage their knowledge of local resources and longstanding

relationships with local suppliers to build reliable supply chains

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RESPONDING TO INSTITUTIONAL VOIDS : REGULATORY
UNCERTAINTY
HOW DO BUSINESS GROUPS RESPOND TO INSTITUTIONAL VOIDS
REGULATORY UNCERTAINTY: (State intervenes in business operations/
decisions, hard to predict actions of regulatory bodies. Eg. Indian laws
still require companies to get permission from government officials &
bureaucrats for a range of decisions)

– Business groups can leverage their experience and connections

with government and bureaucrats
– to act as intermediaries when their individual companies or
foreign partners need to deal with the regulatory bureaucracy
– to access strategic information in a timely fashion

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 BUSINESS GROUPS: SUCCESS FACTORS

BUSINESS GROUPS DOMINATED EMERGING MARKETS BY

Responding to institutional voids by
– Creating internal markets for intermediates products, labor and
capital
– Leveraging
• group reputation to access proprietary technologies
• Relationships with local suppliers to build reliable supply
chains
• Connections with government & bureaucrats to respond to
regulatory uncertainty

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 BUSINESS GROUPS: SUCCESS FACTORS

– Treating institutional voids as business opportunities

– Eg. Infrastructure weakness:1900 – 1915
– Tata entered
• Steel & Cement – for all infrastructure building activity
• Power generation
– Eg. Missing Specialised Intermediaries: 1980 – 2005
– Tata entered
• Consulting Services (Financial, Technology/ IT)
• Insurance

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 BUSINESS GROUPS: SUCCESS FACTORS
– Establishing reputation for quality by
• Leveraging group identity to extend product lines &
diversify business
– Developing cost efficient local eco-systems by
• Using local resources (raw materials, components etc)
• Developing locally recruited talent
– Becoming deeply woven in the economic and social fabric by
• Extensive business diversification
• Catering to most market segments
(eg. Titan designer watches used by the high income consumers,
Tata salt used by the poorest, Tata trucks in semi-urban roads)
• Socially embedded
(eg. Tatas & Birlas have contributed to community building –
schools, research institutes, places of worship & cultural activities)
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 LESSONS ON WINNING IN EMs

– Speed of entry – First mover advantage

– Avoid global segment (top) trap – leap to the bottom
– Adapt, Innovate – country specific products
– Making Social Impact – seen as doing good for the country
– Treating institutional voids as business opportunities
– Mindset - Risk taking, Passion, CEO commitment
– Creating a local ecosystem - empowering local country managers

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 REFERENCES FOR BUSINESS GROUPS

– Khanna, T., and Palepu, K. 1997. Why focused strategies may

be wrong for emerging markets. Harvard Business Review, 75
(4), Jul/Aug: 41-51.
– Khanna, T. & Palepu, K. 2010, ‘Emerging Giants: Competing at
Home’ in T. Khanna and K. Palepu (eds.), Winning in Emerging
Markets, Harvard Business School Press, Boston, pp. 156 - 162.

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 THE END

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