Entrepreneurial Success: “Rough Diamonds” project by SKOLKOVO business school and Ernst & Young

26.01.2012

Ernst & Young and Moscow School of Management SKOLKOVO have developed a joint project “Rough Diamonds (RDs)”. This project explores high performing enterprises in emerging markets. These firms are described as "Rough Diamonds (RDs)" because they are mostly undiscovered. “RDs” are able to outperform other enterprises in their own country over a sustained period of time.

Seung Ho “Sam” PARK, Chair Professor of Strategy, President of SKOLKOVO Institute for Emerging Market Studies (SIEMS) says: "The Rough Diamonds illustrate the fast growing competitiveness of private entrepreneurs in emerging markets. They represent the vibrancy of the private sector and the engine for sustained growth in emerging economies. This joint project between E&Y and SKOLKOVO business school illuminates important insights on the success of these leading entrepreneurial firms in BRICs. The findings provide a valuable benchmark for local and multinational companies operating in emerging markets."
 
Andrei Volkov, Dean of the Moscow School of Management SKOLKOVO, says: “Today, when ex-pillars of the world economy are rapidly losing ratings and investors’ trust, such studies help us take a fresh look at the companies in the developing countries and to see the silver lining even in this cloud”.
 
Karl Johansson, Ernst & Young CIS Managing Partner, notes: “We believe these findings will provide insight on the understanding of winning strategies in emerging markets”.
 
Key Findings
 
The research focuses on three broad areas to understand the success of RDs: initial success, core competence, and growth management. Below we briefly discuss the key findings in these three areas.
 
Initial Success
 
The early success of RDs can be explained by three factors: entrepreneurial insights, the discovery of niche market, and access to key resources. The economic liberalization of emerging markets provides a large number of such niche markets with huge growth potential. For China and Russia, the shift from planned economy to market economy opens domestic markets for private firms. For India and Brazil, government support for import-substitute products also encourages the development of firms in certain industries.
 
Core Competences
 
The core competence of RDs in emerging markets centers on the following areas: quality, innovation, customer-orientation, supply chain management, operational efficiency, and management system.
 
China
 
In terms of country differences, relational capital overwhelms in Chinese RDs' success. Relational capital entails assets that are created through relationships. It can be derived from the relationship with various parties, such as customers, suppliers, shareholders, and other stakeholders. Relational capital is important in China because relationships become fundamental parts of economic and social exchanges and serve as complements to the weak formal institutions.
 
Russia
 
A key common factor in Russian RDs' early success is the well-educated, experienced, and connected entrepreneurs. The founders’ entrepreneurial insights helped them overcome the legacy of state-owned operations and adopt technological skills for new market opportunities. They were able to develop a strong managerial system that led to sustained high performance during the last decade. Their strategic vision has been carried out through highly-focused and domestically oriented growth.
 
Brazil
 
The key advantage of many Brazilian RDs is their brand. Brand is an important firm resource that creates competitive advantages over competitors. Brand building takes time and a series of dedicated efforts. The history of Brazil economy provides such opportunities of brand building for Brazilian RDs.
 
India
 
Indian RDs stand out in terms of their strategic thinking and innovation capabilities. Most of them achieved their early success by targeting the bottom of the pyramid, innovative ideas to target untapped, broad low-income markets in India. It is not necessarily technologically advanced innovations creating new markets, but innovations through product differentiations and discovering latent markets.
 
Growth Management
 
RDs grow fast in the past decade. RDs manage growth differently. Chinese firms are the most actively diversified, both in product and geographical dimensions. Most of the RDs diversify into unrelated and related businesses within a short period of time, and they also participate in international expansion early in their development. One possible reason for the vast diversification is that the utilization of relational capital is not constrained by industries and borders. Brazil RDs rank second in the extent of diversification. Since their primary strength lies in brand, they could pursue growth broadly into different sectors and countries exploiting the primary brand. Without relational capital or strong brand that could be applied in other areas, Indian and Russian RDs followed constrained and carefully managed diversification. Instead of pursuing broad diversification, they choose to remain focused and seek growth by enhancing and solidifying market positions in their own primary markets and business areas.

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