What is your definition of an emerging market?
An emerging market is a market that is emerging – obviously. A well-functioning market requires a lot of infrastructure to bring together two parties to do business. An example of a good market is the stock market; a bad market is more like a used car market.
An emerging market is a market that is emerging – obviously. A well-functioning market requires a lot of infrastructure to bring together two parties to do business. An example of a good market is the stock market; a bad market is more like a used car market. An emerging market is closer to a used car market in some sense. There are lots of things that go wrong when people are buying and selling things; there are too many unknowns. The institutions that typically allow you to get rid of those unknowns and do transactions at a very low cost are either underdeveloped or missing altogether. I’m talking mostly about soft infrastructure like information, enforcement of contracts, etc. These are the types of institutions that work well in developed markets that emerging markets are usually lacking – this is called an institutional void.
Why should we look at emerging markets differently than other markets?
Just because you know how to drive a high-performance car on the German autobahn doesn’t mean you can take that same car on a rural road filled with potholes in India. It’s a completely different experience. While a company knows how to do business in a finely tuned market with enforced rules and regulations and other institutions, if you take the same business model into China or India it won’t work. There are too many potholes – or institutional voids – and a company needs to think about what in its business model needs to be adapted.
Not only do multinational companies – MNCs – face competition from other MNCs in emerging markets, but they also face rising local companies. What do MNCs need to look out for from these local companies?
It’s very important to be aware of the environment in which you’re doing business. MNCs go into these countries and are often blind to the local companies or deal with them with a sense of dismissal. Increasingly you are bumping into these local companies; they can be partners, they can be competitors, they can be both, they can also be your customers. You really do need to be aware of the aspirations of these local companies.
It’s important that you’re seen in these countries as a partner in their own progress. These are newly rising economies that have dreams and aspirations. If you’re seen as an opportunist you will be treated very differently than if you’re seen as a contributor to the society’s development. In this process you need to think about how you’ll relate to the local entities.
What are the key issues that an MCN must crack to win in emerging markets?
The first thing you need to realize is that you don’t have all the products and services already. You should not think that the only task you have is to go in and sell. You need to think of emerging market opportunities very broadly and ask what the nature of the opportunity is. The second thing is, even if you want to just go in and sell, you have to innovate. Don’t think of it as business as usual. You must think about appropriate solutions to local business needs, and often price point is a very important element of the innovation process. By innovation I don’t mean just product innovation; it might be the business model that needs to be rethought.
This interview was conducted with Krishna G. Palepu in Denmark in March 2011. You can read an excerpt of his book at www.winninginemergingmarkets.com.