To evaluate why core competence does not deliver results in certain contexts, let us now, look at the theory of the firm and explore the peculiar demands of emerging markets. The Jensen-Peterian perceptual framework of `sticking to one's knitting' rests on the tenets of specialisation and efficient markets, while ignoring the evolutionary/ regulatory context, the implications of portfolio theory, and the inherent agency conflicts.

The following section evaluates the oversights in the classical interpretation of core competence and the specific applicability of core competence to emerging market contexts.

Specialisation: Core competence, rests on the theory of the firm and perfect competition, which assumes, a) Standard products, b) Multiple buyers and sellers, c) Freedom of entry and exit. These conditions, especially b & c, have limited relevance in highly regulatedeconomies. Although much of the economy has mature industries, government licensing and tariff protections, create asymmetries in the market. These seller and price control mechanisms, provide the vendors with monopoly powers, creating an artificial seller's market, where a free market explanation does not find much currency. Also emerging markets are much more price sensitive, which has encouraged companies to pursue low cost strategies to the exception of all else.

Capital markets: Perhaps the most significant impact on this debate is that of the maturity and sophistication of the capital markets in an economy. The primary driver of market sophistication is institutionalisation. With an army of dedicated analysts and market watchers, institutions like pension funds and mutual funds can materially alter market dynamics.

Pension funds alone now own 25 per cent, by value, of all corporate shares traded in the United States and that figure is expected to keep growing. Together, institutional investorsaccount for over 80% of all trades in the US capital markets. In comparison these figures are substantially lower in emerging markets. The biggest drawback of a non-institutionalised market is its dependence on sentiments as a key market driver - a dependence more on noise than on information. A highly fragmented market of individual investors lacks the power demonstrated by shareholder activists in mature markets.

This fundamental difference has encouraged numerous participants to operate on the assumption that markets have short memories, making fine print jugglaries rather common. The breadth of the market is the other key driver. The patent lack of venture capital firms, which specialise in dealing with risk capital, severely limits entrepreneurial ventures. Concept stocks, or idea based ventures, the mainstay of Silicon Valley and biotechnology firms and some would argue, one of the forces driving the Dow's current run, is virtually non-existent in emerging markets.

The lack of real assets in theseventures limits funding by conventional firms, driven primarily by collateral based finance. This also eliminates entirely the other key source of finance - debt. Cost of transactions is also higher in the emerging markets, which have inadequate depository functions to pool transaction risks and inadequate dealer networks to bring down high spreads maintained by brokers. These costs, limit smaller players from becoming active in the market.

Capital market regulations exerts a significant impact on market efficiency. Equity markets in emerging economies tend to be highly regulated. Issues as varied as short sales, corporate buy-back of shares, repatriation of funds and even takeover codes are zealously regulated, in a quest for stable markets.

Apart from the above assumption, proponents of non-diversification do not factor the following critical issues. Economic evolution: Perhaps the most significant exception to the Jensen-Peterian theory is the economic evolutionary context of diversification. Studieshave revealed that economies tend to evolve through a set of developmental phases, going from a pursuit of sheer size to global diversification.

The evolutionary framework puts in perspective the strategic variables that distinguish emerging markets from the mature ones, especially as it applies to diversification imperatives. Let us analyse the evolutionary dimensions demonstrated by the now-mature American industry and draw parallels with other economies undergoing evolution. In the first stage American companies grew big to achieve economies of scale.

At phase two, horizontal and vertical diversification allowed companies to consolidate market power and control key supply and distribution functions. Stage three involved international diversification. In the fourth stage, companies diversified into related businesses by emphasising R&D, adding new products, and then increasingly through M&As. Advanced American MNCs are currently engaged in the fourth stage. Emerging market companies are mostly in thesecond stage or are just entering the third.

Given the peculiar structural and regulatory context presented in emerging markets, companies look to secure market power by controlling key suppliers and `filling the institutional, voids.' However, to argue that these conditions would persist in the long term would be wrong. As the economy matures, specialists will replace `umbrella' organisations, thereby increasing overall efficiency. There are two advantages the specialist enjoys even in this (second) stage of development.

One, vertically/horizontally diversified companies perform a lot of transactions within the group, which leads to cross-subsidisation of operations. Two, groups with diverse holdings/subsidiaries offer a consolidated return to its shareholders. This averaging of returns across subsidiaries, lowers the return possible with only the flagship operations.

With increased shareholder activism and assertive markets, the demand for businesses to spin-off poor performers and consolidate aroundcore competencies would rise, giving the specialist an edge in securing capital as well as a market for its products.

Corporate portfolio strategy: That business undergo introduction, growth, maturity and decline is universally acknowledged. Equally well understood are the business implications of the above mentioned life cycle, especially as they apply to cash flows. The funds intensive introduction and growth phases contrasts with the surplus funds generating maturity phase.

The portfolio theory of operating a business portfolio, with independent business in varying stages of development, balancing the funds flow, while ensuring corporate perpetuity, finds ready converts in majority of managers worldwide. The portfolio theory enjoys an even more profound following in the Indian manager, given the specific framework.(To be concluded)
(The author is a consultant with one of the world's leading strategy consulting firms)