Strategies That Fit Emerging Markets

Key ideas from the Harvard Business Review article by Tarun Khanna, Krishna G. Palepu, and Jayant Sinha

The Idea

What’s the fastest-growing market in the world for most products and services? Developing countries. Yet many companies shy away from doing business in these nations. CEOs are all too aware that such countries lack the market institutions needed to do business successfully—such as consumer-data experts, end-to-end logistics providers, and talent search firms.But avoid investing in developing countries, and you won’t remain competitive for long. How to mitigate the risks? As authors Khanna, Palepu, and Sinha recommend, first analyze each country’s institutional context, including political and social systems; openness to foreign investment; and quality of product, labor, and capital markets.Then decide: Should you work around your target country’s institutional weaknesses? Create new market infrastructures (for example, your own in-country supply chain)? Or stay away because adapting your business model would be impractical or uneconomical?Dell Computer chose to adapt its business model to enter China. After discovering that Chinese consumers didn’t buy over the Internet (a cornerstone of Dell’s North American business model), Dell sold its products through Chinese distributors and systems integrators.Correctly diagnose developing countries’ institutional contexts, and you make savvier foreign-investment decisions. You avoid markets you can’t profitably serve—while capturing the wealth of opportunities presented by other emerging markets.

The Idea in Practice

Diagnose Institutional ContextsDecide Your StrategyBased on your target’s institutional context, decide whether you’ll:• Adapt your business model: Ensure that changes to your model preserve your competitive advantage. Example: In the U.S., McDonald’s outsources supply chain operations. But when it tried to enter Russia, it couldn’t find local suppliers. So, with help from its joint venture partner, it identified farmers it could work with and advanced them money so they could invest in seeds and equipment. And it sent Russian managers to Canada for training. By establishing its own supply chain and management systems, it now controls 80% of the Russian fast-food market.• Change the institutional context: A powerful company’s products or services can force dramatic improvements in local markets. For example, when Big Four audit firms set up branches in Brazil, their presence raised country-wide financial-reporting and auditing standards. That in turn gave multinationals with Brazilian subsidiaries access to global-quality audit services. • Stay away: If adapting your business model is impractical, avoid investing. Example: Home Depot’s value proposition (low prices, great service, good quality) hinges on many U.S.-specific institutions—including reliable transportation networks to minimize inventory and employee stock ownership to motivate workers to provide top-notch service. It avoids countries with weak logistics systems and poorly developed capital markets, where it would have difficulty using its inventory management system and may not be able to use employee stock ownership.