Strategies That Fit Emerging Markets

It's no easy task to identify strategies for entering new international markets or to decide which countries to do business with. The best way to do this is by using the five contexts framework

by Tarun Khanna, Krishna G. Palepu and Jayant Sinha

The Idea in Brief

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 Contexts

Criterion

Sample Questions

Example: Brazil

POLITICAL AND SOCIAL SYSTEMS

• How is power distributed among the central, state, and city governments?

• Do laws protect private property rights?

• Is the judiciary independent?

Has a vibrant democracy, though pockets of corruption exist in federal and state governments.

OPENNESS

• What restrictions does the government place on foreign investments?

• How cumbersome are procedures for launching new ventures?

Outside companies partner with locals to gain local expertise.

PRODUCT MARKETS

• Can you obtain reliable data on consumer preferences?

• Is there a deep network of suppliers?

• How strong are transportation infrastructures?

Suppliers available in the Mercosur region. Good network of highways, airports, and ports.

LABOR MARKETS

• How strong are educational institutions, especially for technical and management training?

• Do people do business in English?

• Is pay for performance standard practice?

Managers have varying degrees of proficiency in English. Trade unions are strong.

CAPITAL MARKETS

• How effectively do banks collect savings and channel them into investments?

• How reliable is corporate performance information?

Bankruptcy processes are inefficient, while financial-reporting systems function well.

Decide Your Strategy

Based on your target's institutional context, decide whether you'll:

Adapt your business model: Ensure that changes to your model preserve your competitive advantage.

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.

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.

Provided by Harvard Business—Where Leaders Get Their Edge