This is an old story: As the growth in the markets in the West declines, multinational firms scan the landscape, seeking markets where the growth rate is high. They rely on insights from market research. They look at demographic trends. They monitor stock market returns. They assume there is a market niche not yet filled. They believe that their superior quality and systems will take them to a vantage position, and they will be able to command a large market share. Then, they will ride on the crest of the wave—the above-normal rates at which emerging markets grow.

Winning in Emerging Markets: Harvard Business Press, 246 pages, $35 (around Rs 1,550).

But the grapes aren’t really sour. They can be sweet; they too can produce wine, if only you know how to get it right.

The logic of management books is that they observe war stories from the marketplace, analyse commonalities and figure out underlying trends, presenting certain simple principles that can guide business decisions in similar circumstances. The book that lasts for a week at an airport best-seller counter tells you simplistically how everyone can get rich; the book that survives the hype explains the caveats carefully and is honest about limitations. The more such books rely on real-life stories from across the globe, and the more they dissect stories of companies not researched adequately earlier, the more robust their conclusions are. One such book is Winning in Emerging Markets: A Road Map for Strategy and Execution by Harvard professors Tarun Khanna and Krishna Palepu.

Krishna Palepu (Stuart Cahill) (left); and Tarun Khanna.

The origin of the project goes back to the mid-1990s, after the fall of the Berlin Wall, when liberalization had been established firmly in China and was taking root in India. Harvard started a programme for senior executives, about managing global opportunities, and the three-week programme included one week’s field work in India or China. Professors Palepu and Khanna were among the faculty that taught the course.

Spreadout: Tata saw his conglomerate’s diversity as an advantage. Abhijit Bhatlekar/Mint

Conglomerates are difficult entities to manage, after all: The East Asian crisis of 1997-98, which I reported for the magazine, Far Eastern Economic Review, had shown that family-owned companies which had expanded without much thought in apparently lucrative sectors (banking and power generation being two such in Indonesia; property development being another such in Thailand) had suffered hugely. An Internet provider in Singapore also owned a bakery—and didn’t think of offering Internet cafés, thus failing to exploit the one advantage synergy offered on that tech-savvy island. One consultant in Singapore had referred to conglomerates as providers of inefficient venture capital in markets without sophisticated financial intermediaries.

To be sure, while the dominant view in international management schools is to focus on core competence and “sticking-to-the-knitting", or not deviating from what the firm knows best, there are excellent examples of Western conglomerates—GE being one prime example, and to a limited extent, Richard Branson’s Virgin Group is another one.

Tricks of the trade: The Tata Steel factory in Jamshedpur.

In the early 1990s, Western management experts told family-owned companies in India to focus, otherwise they’d become someone’s dinner when their sector of the economy would get liberalized. But the more Prof. Palepu talked to CEOs, the more intriguing the question became: Focus on what? The depth of the market in individual segments was often so shallow that if you remain firmly focused, you might become a tiny enterprise. Tata Steel was not a large multinational in those days (the acquisition of Corus was a decade away); Tata Motors’ annual volume of trucks manufactured was about 60,000.

Focused multinationals had faltered in emerging markets—think of Hindustan Unilever’s struggles with Nirma; Tang’s inability to replace Rasna; the durability of Thums Up in a market with Coke and Pepsi (Coke dealt with the problem by buying Thums Up, but did not kill the brand). Professors Khanna and Palepu then decided to study the issue further: Are focused companies better than conglomerates in emerging markets? If not, why? And what’s the theory underpinning that?

Professors Khanna and Palepu define an emerging market as an economy which is poor and not largely industrialized; where capital markets have few listed stocks, low turnover, and a low capitalization compared with the country’s gross domestic product; and yet the economy has opened, and shown growth potential. The key to succeed, Prof. Khanna told me during a recent conversation in London, is that a successful business from an emerging market is prepared to deal with the hand that history has dealt.

This means coping under circumstances where support structures are missing. Professors Khanna and Palepu call these “institutional voids". These are transaction facilitators, such as institutions providing financial intermediation, as well as law firms; credit enhancers, which include credit rating agencies; information analysers, which include market research firms and consultancies, as well as consumer magazines; and unbiased adjudicators, such as regulators and court systems. The choice for the firm is: replicate or adapt; compete or collaborate; accept, or attempt to change the market; and enter or exit such a market. Drawing on a rich database of examples, they set out strategies for companies that are context-specific, and not one-size-fits-all.

There is one danger, though: Emerging markets are informal, and in such informality, relationships are also informal and opaque. The Chinese have a word for it, guanxi, or connections. The informality in relationships in emerging markets is built on trust, and such trust often means businesses deal with other businesses from the same clan, community or creed. The fine line between specialization and nepotism gets blurred. Prof. Palepu says that ethnic trust of this sort substitutes the formal trust as understood in the West—where you trust, but there is also the threat to sue.

Given that you have to deal with the hand dealt to you, what do you do? You create your own knowledge. Companies such as China’s Haier have shown innovative ways of marketing freezers, with separate freezers for ice cream and other foods (so that the ice cream doesn’t need to be thawed or microwaved before your spoon or your teeth can sink into the scoop). Zain, a West Asia-based telecommunications company, has optimized software for dynamic charging. Teva, an Israeli pharmaceutical firm, has capitalized on the huge concentration of PhDs in Israel. An employment intermediary in India, which tests candidates, vouches for their calibre and acts as a clearing house for companies looking for employees for the less high-profile sectors of the economy. The book abounds in anecdotes of this kind.

These companies’ strengths lie in making things work inside the group; applying capital properly; monitoring performance; making sure that the company’s reputation remains intact so that it can attract talent and be a desired joint venture partner. If the company gets these basics right, then even if contract enforcement is not perfect in the country, partners will come, and opportunities will grow. That’s how you add the value that the economy subtracts.

Salil Tripathi writes the columnHere, There, Everywhere for Mint.

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