Opinion: Doing business in an institutional void

Tarum Khanna and Krishnna G. Palepu:Winning in Emerging Markets: A Roadmap for Strategy and Execution, Harvard Business Press, 2010.

According to a Western executive quoted in this book, “There’s a very nice saying in India, which is: you might have the clocks, but we have the time.”

Anyone who has ever dealt with Indian bureaucracy knows exactly what this means.

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Despite some of the challenges of operating in countries like India and other emerging markets, their attraction for Western companies seeking growth has only increased in recent years. Largely insulated from the ravages of the recession, these markets are forecasted to grow three times faster than developed ones over the next few years

In Winning in Emerging Markets, the authors seek to provide a structured framework to help executives assess opportunities in these markets, identify the risks involved and the adaptations to their business models that may be necessary for success

Both Tarum Khanna and Krishnna Palepu are professors at the Harvard Business School where they’ve been researching emerging markets long before it became fashionable. 

The authors note that despite strong brands and superior technological and financial capabilities, Western multinationals have had mixed success in emerging markets. They attribute this to the common assumption that what works in the West will work in these markets, leading these companies to force fit conventional business models upon them.

To help counter this tendency, the book offers a systematic way of thinking about how emerging markets are different from developed markets and from each other. In particular, the authors note that most emerging economies lack a range of institutions that facilitate the proper functioning of markets including consumer and market research firms, capital markets, payment systems, logistics providers, regulators, analysts and impartial courts.

They refer to the absence of these players as institutional voids. Each emerging market, they note, holds a different set of institutional voids based on history, politics and culture.

Institutional voids present companies with higher transaction costs and operating challenges. Without government to do it for them, businesses often have to perform some  of these functions themselves. But the authors also see these voids as opportunities for companies to exploit as they build their business models.

The book provides frameworks and tool kits to help companies map the institutional context of an emerging market, identify its institutional voids and attendant risks and determine what elements of their business models are likely to be adversely affected and how this can be mitigated.

It also offers a number of case studies of Western companies that have succeeded or failed in emerging markets due to their ability – or lack thereof – to deal with institutional voids. These include McDonald’s, Microsoft and Home Depot, among others.

McDonald’s successful replication of its menu in Russia, for example, required it to actively fill voids in its supply chain. This involved improving supplier capabilities, creating training programs for quality standards and farm management practices, and establishing its own trucking fleet.

And Microsoft found the best way to make the Chinese more sensitive to its intellectual property concerns was to help the country develop its own software and IT sectors, through alliances and investments in educational and research initiatives.

Home Depot, on the other hand, found its initial foray into emerging markets hampered by institutional voids that made it impossible for it to deploy the logistics management system central to its competitive advantage.

The last sections of the book provide several case studies of emerging global companies from these markets, looking at how they have dealt with institutional voids domestically and the impacts this has on strategies they use to “go global.”

Increasingly, companies in developed markets will find that their success globally will be largely determined by success in emerging markets. This book is a very useful reference for executives looking to develop strategies for these markets.

It is important, however, that they not be seen only as vast new markets for products and services – several, like China and India, are becoming major innovation and product development hubs.

Moreover, as the book notes, domestic companies in these markets are developing disruptive new business models to reach their cost-conscious customers.

Those models will soon be coming to a market near you.

Micheal J. Kelly is a professor at the University of Ottawa’s Telfer School of Management.

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