The big idea: Emerson Process Management sought to expand into Russia, a vital emerging market with one of the largest oil and gas reserves in the world. This was an opportunity for the St. Louis-based company to build its process automation and control systems business, which aimed to improve productivity.
In the past, the company had boosted revenue by following big multinational oil companies abroad and providing them with intelligent control systems, software, measuring devices and valves. After the fall of the Soviet Union, Russia didn’t want foreign companies controlling its energy sector. So it turned over parts the state-run oil and energy industry to private Russian enterprises like Metran. Founded in 1992, Metran was a manufacturer of process automation equipment, too, though it mainly built pressure transmitters.
Emerson would set out to acquire Metran to gain access to the Russian market — a risky way to do so.
The scenario: In 2004, Russia ranked second behind Saudi Arabia in the production and export of crude oil. The country also held the world’s largest natural gas reserves and the second-largest coal reserves. Until 1996, Russia had prohibited non-Russian firms from owning manufacturing facilities in the energy sector.
In 2004, Emerson looked hard at acquiring Metran. Concerns loomed. Metran’s unit margins were low and its product quality variable. Emerson questioned Metran’s relationship with Pribor — a state-owned mechanical and electronic equipment manufacturer. Most employees had limited English skills, including top managers, and Metran’s headquarters was in Siberia, far from the power brokers in Moscow. One other question kept cropping up: What if Russia walked away from market reforms and slipped back to a centrally planned economy and state-run companies?
The resolution: Emerson took the plunge. It brought in a Western manager experienced with Eastern European languages and culture. It set out to control operations, build local management skills and invest in local leadership. The plan was that Metran would be a wholly owned Emerson subsidiary within five years. Emerson funded a local college to teach engineering, English and other pertinent skills to students who could then be hired by Metran.
Then unforeseen political events arose. Russia’s invasion of Ukraine in February 2014 resulted in U.S. trade sanctions against Russia. Nonetheless — and despite the slowdown in the exploration and expansion of the oil industry because of a world oil glut — Emerson gained market share because the American-owned company was perceived as Russian.
The lesson: Companies bent on expanding abroad must be attuned to the culture of a country and enmeshed in its life to truly succeed. Firms should learn to become “local” to help weather political turmoil and to win over the populace and political leaders. As one company executive said: “Culture eats strategy for lunch.”
Fairchild is an associate professor at the University of Virginia Darden School of Business.
Shahir Kassam-Adams, a Darden Ph.D. candidate, contributed to the original case study.