Do companies in emerging and developed countries do the same?

The leaders of two commercial enterprises in Turkey, Rahmi M. Koç and Hamdi Akin, discuss with Professor Felix Oberholzer-Gee the advantages and challenges of entrepreneurs in an emerging economy.

by Sean Silverthorne

On September 12, 1980, the army launched a coup against the government in Turkey. For many leaders, this instability is the worst business nightmare in a developing country. But for the Turkish entrepreneur Hamdi Akin, who was usually outside, suddenly the playground was open and he took advantage of it. It will eventually build Akfen Holding, today one of the largest construction companies and operating infrastructures.

“As an underdog in the past, this was a fantastic opportunity,” says Felix Oberholzer-Gee, business economist Professor Andreas Andresen in the Strategy Division of Harvard Business School. “No one had connections to parliamentarians – he built his business partly on this possibility.”

“No one had connections to parliamentarians – he built his business partially to this possibility”
The idea that political or economic turmoil causes both corporate destruction and opportunity is part of a series of reflections for readers of recent HBS interviews with two prominent Turkish leaders: Hamdi Akin, President of Akfen Holding, and Rahmi M. Koç, Honorary President. Koç Holding.

The societies that led these men during appalling periods of growth are similar in some ways, but very different in others.

With a turnover of 30 billion dollars, the Koç Group is the largest conglomerate in Turkey with more than 100 companies and 73,000 employees in the areas of consumer goods, financial services and energy. It was founded by Rahmi’s father, Vehbi Koç, in Istanbul in 1926 and developed while Turkey was largely a closed economy. Although he employs professional managers, family members remain very influential. As Koç explains in his interview, the company believes it can interfere in the family affairs of its executives, family or not.

Akfen Holding, 50 years after the founding of Koç in Ankara, owns various construction companies, engineering firms and other infrastructure development companies. It has about 36,000 employees. The company is traded on the stock exchange, but the controlling shares are owned by the family. While Akin is the founder and president, the family is not involved in the daily operations of the company.

Istanbul night scene where group Koç

Was found. © iStock / muhur
The interviews are part of a growing collection of business leaders from developing countries. The Creating Emerging Markets project is funded by the Business History Initiative of Harvard Business School.

We talked to Oberholzer-Gee, who conducted the two interviews in early 2015 to discuss the differences and similarities between start-up, management and leadership in emerging markets companies.

Sean Silverthorne: When we think about economies or developing countries, instability is often perceived as negative. Should you start a business in a place where the rule of law is suspect? But Hamdi Akin seemed to be successful in the political turmoil in Turkey.

Felix Oberholzer Gee: Creative destruction is an old idea that goes back at least to Schumpeter. We usually associate it with entrepreneurship. Someone has a great new idea, everyone is excited and the entrepreneur and his clients are much better off. But in the meantime, someone else’s capital is likely to be undermined. Creative destruction of a different kind occurred during the political transition in Turkey in 1980 after the military coup. Earlier political and social ties have lost their value at night. 450 new people are sitting in parliament and nobody has a long history as a politician.

You could see that as a huge loss of capital. In fact, much knowledge has been lost in this transition. Many people had to find new things, learn to work under difficult circumstances. But for Akin, who was an outsider in the previous era, it was a fantastic opportunity. No one had connections to parliamentarians – he partially built his business out of this possibility.

Many academics stress the benefits of stability. If we see unstable political regimes or uncertainties in the law, we assume that this harms the economy. We prefer stable situations and long-term horizons where managers can invest. The example of Turkey offers a broader view: yes, the transition to a military regime undermines social capital and the rule of law. At the same time, the disruption is an opportunity for foreigners who have a harder time starting businesses under the old regime.

Question: How is the relationship between business and government different in developing and industrialized countries?

A: I do not know how different it is. We love black and white, so we think that the US economy is market-driven and that these emerging markets, where the government is everywhere, have a disproportionate impact. Honestly, I think there is more gray than black and white.

For a very large group like Koç, relations with the government are essential, as many of the key business opportunities influence politics. Can you engage in energy without having a very close relationship with the government? Probably not. We recently wrote about Turkcell, the leading telecommunications operator. It is not surprising for these types of companies that the governing body is part of the inner circle.

You can see Turkcell and see a typical history of the emerging markets. Government intervention is everywhere. The regulators even determine the prices, service after service. The competition is well organized. But what is the difference to mature markets? Who decides if you can buy T Mobile? US Department of Justice. Who decided it would be a good idea to send a text message to consumers before they exceeded the data limits on their mobile phones? The Federal Communications Commission.

But of course there are differences. Emerging governments are reluctant to treat companies unequally. In the mobile phone market, the Turkish government sets minimum and maximum prices. And the prices for Turkcell are different from those of the Turkcell competitors. That’s the sort of regulation you’ll see less in mature markets because the judiciary and independent tribunals are putting pressure on the government to make it fair.

Q: Are there common features among successful emerging market leaders? Are the executive skills they need fundamentally different from those in mature economies?

A: In many emerging markets, excellence can be a source of amazing success. The Koç Group is very successful in the white goods industry. You look at it and ask, what is the source of success? Are you doing something completely unknown? I think the answer is progressive improvement and spectacular performance.

People who know how to create and manage a truly solid business can be very successful without a really new idea. What makes the business idea is not the novelty of the products. Understand how to build local distribution, how to get from washing machines of relatively low quality to good quality washers. It is not rocket science. Many people had the necessary skills, but few saw the possibilities and said, OK, I’ll do it.

Although this model of success is commonplace, it would be wrong to believe that emerging markets are only versions of earlier markets that are now mature. What is almost always true for emerging markets is that there are modern-day islands where the emerging economies are ahead, and there are islands where they are lagging behind.

Q: The two companies have managed to globalize their business, but Koç also describes the difficulties faced by emerging market companies in dealing with developed-market economies. In his interview with you, he says, “It’s not easy in this global world, the competition is very, very tough, even ruthless, the parent companies in other markets are very strong, you can afford to lose ten years to to gain control of a market. ”

A: The Koç Group has made remarkable achievements in the globalization of the group. At the same time he remained a Turkish group, as one would expect. Rahmi Koç puts forward his point of view by explaining how difficult it is to enter mature markets, especially if you do not have a well-known brand or reputation. Some Turkish companies have bought old brands to overcome this barrier.

For example, Koç bought the brand Grundig in Germany. Grundig was famous for his radio and television. But Koç has also extended the scope of the brand to white goods. It is an attempt to penetrate markets that are dominated by companies that have a good reputation. Why should a Turkish company (Yildiz Holding) buy Godiva? It’s not so much that Godiva makes chocolate like no other. It’s because people trust the name.

In markets where differentiation is important, it is easier to partner with leading companies that dominate world trade. But if you’re in white goods, it means gradual improvement and operational efficiency. And brands are important. The importance of operational efficiency makes it easier to build up national capacity, but makes access to markets in Western Europe and North America more difficult. Not impossible, think LG, think Samsung, but expensive and difficult.

Q: Especially in your interview with Koç, it became clear that he considered the reputation of his company to be very important. I’m not sure if you hear from western leaders that they emphasize the reputation of their success as much as the other qualities. Or do I say that?

A: someday. It is not difficult to think about mature market companies whose main asset is reputation. And the loss of reputation can be devastating, think for example of the current crisis of Volkswagen. But you are right that the reputation value in business environments increases with greater uncertainty. If you look at the big business groups in Turkey, you might wonder why all of these companies are grouped under one roof. What is there between energy, washing machines and cars? An answer might be that the resource you have is the call of the group. When you enter a new business, for example financial services, why should you trust? Their benefits may come in part from tangible assets such as capital or access to talent within the group. I think reputation is just as important when you know it’s Koç or Akfen.

Q: Koç and Akfen are two families. Is that an advantage?

A: One of the ideas is that family businesses have a longer time horizon, that they are less prone to short-term pressure. There is some empirical evidence that family businesses can make long-term decisions, but the evidence is unclear. And families can have significant disadvantages for running a business. My colleague Raffaella Sadun has done some fascinating research explaining that family businesses often do not adopt management techniques that are closely related to better financial performance. It is therefore at least an open question whether it is an advantage to be a family business.

The Koç solution that fascinates me is that daily operations are firmly in the hands of professional external managers. As Rahmi Koç explains in an interview, managers need a lot of time to earn their stripes. Patience avoids some of the tensions of the (pure) family business. On the one hand you have a larger pool for the selection of talent, but if you come to responsible positions, you are almost in the family.

Q: Koç insists that the company does not hesitate to engage in the private lives of executives, including non-family employees.

A: Yeah, you’re the pro who comes in, but we’re expanding the relationship – we go out with your family, we all go to picnics and so on. It feels like a little cousin or nephew. There are parallels to US listed companies. Sam Walton was famous for his meetings early Saturday morning. Business was first, but families were there too. Saturdays were business and family affairs.

Q: Why has governance evolved in some of these companies?

A: It is wise management in good part. They see the tradeoffs and know that they can not be a traditional family business in an increasingly competitive and demanding environment.

The 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) ready for life. Now it’s a competitive game, now you have global opportunities. A family business has a different impact on performance. Many practices of the big Turkish business groups – how to apply themselves, how they are interested in personal matters and family life – balance these two forces.

Q: What can readers of these interviews learn about how they work or improve themselves or their organizations?

A: The first thing I noticed was the fact that doing business in emerging markets is just a business. It is the essence of global management. A thousand things change completely as we go from one market to the next and a thousand things remain exactly the same. The difficulty lies in recognizing who needs to change what can stay the same.

Some inexperienced leaders in emerging markets expect them to be radically different. That’s the bad impression.

In interviews, I was deeply impressed by the management capacities of the emerging markets. National companies are very, very capable. Yes, they are subject to specific limitations: we do not see the many middle managers as typical of mature markets. There are not the sophisticated financial markets we are used to, but when you hear that executives are talking about their business and how they think about their sources of competitive advantage, that is not the case with the not so different European and North American meeting rooms.

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