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Introduction

THE WORLD IS FOCUSED on emerging markets.1 The liberal-ization, growth, and globalization of these still-nascent economies have made them tremendous sources of interest, opportunity,

and anxiety over the past twenty years. For households, emerging mar-

kets are a source of cheap consumer goods. For frustrated computer

users, they are often the location of outsourced technical support. For

executives of multinationals, emerging markets are growth drivers amid

stagnation and financial crisis in developed economies—and the home

turfs of powerful new corporate competitors.

In the first six months of 2009, the FTSE International Emerging Mar-

kets Index was up 41.1 percent, whereas the FTSE All World Developed

Markets Index was up 7.2 percent. China, India, and Brazil have reported

robust and significant growth during this period as the developed world

struggled to recover from financial crisis.2 For companies drowning in

the crisis, these markets have offered life preservers of capital and growth.

For upstart entrepreneurs and well-established companies alike, emerg-

ing markets are becoming testing grounds and incubators for innovation.

For entrepreneurs, business leaders, and citizens in emerging markets,

this newfound global standing is a great source of pride.

For some workers in the developed world, however, these markets are

a source of job security angst. This anxiety has only increased in the wake

2 | Winning in Emerging Markets

of the financial crisis and recession in developed markets. For others—

such as Wall Street investment bankers displaced by the U.S. financial

crisis—emerging markets can be havens of new job opportunities. For

new university graduates and young professionals in emerging markets,

this growth has created tremendous opportunities and recalibrated career

aspirations.

For politicians and pundits in the developed world, emerging economies

are both derided as the destinations of offshored jobs and pitched as

prospective customers for vaunted innovative products and green tech-

nologies of the future. For national treasuries in the developed world, the

savings held in emerging markets have helped finance government

deficits. For politicians from all over the world, emerging markets figure

prominently in global trade and multilateral agendas. For environmental

and labor rights activists, the rapid industrialization and undeveloped

safeguards in these economies are cause for serious concern.

In a small but telling sign of a growing perception that emerging mar-

kets were both important and distinctive, the Economist in 1994 began

including a page of emerging market economic and financial indicators

at the back of each weekly issue. The rationale for the feature, the edi-

tors noted, rested on a simple premise: “Rich industrial countries domi-

nate the world economy rather less than they used to.”3 In 2007, the

Economist discontinued the feature, lumping the world’s major economies

together in a single table of indicators.4 Whether the change was made

for substantive reasons or simply to save space, the place of emerging

markets in the global economy changed dramatically in that thirteen-

year period.

Consider a few items that appeared in that 1994 issue of the Economist

in which the emerging market indicators debuted. The magazine’s sum-

mary of the week’s news included a capsule noting the enactment of the

North American Free Trade Agreement (NAFTA), linking emerging mar-

ket Mexico more closely with its more developed northern neighbors—

the United States and Canada.5 One article forecast that India would be “a

power in its own neighbourhood but its frail economy and its physical iso-

lation between the Himalayas and the sea will almost certainly keep it out

Introduction | 3

of the global competition” to be among the world’s preeminent powers.6

A two-page advertisement touted companies from Taiwan, noting, “Many

of the computers crunching numbers and making their reputations on

Wall Street are made in Taiwan. That’s right, Taiwan.”7

Since then, agreements similar to NAFTA have dismantled trade bar-

riers in many emerging markets. India’s economy has boomed, in part by

leveraging global communications technology that renders moot many

of the challenges of its “physical isolation.” The promotional advertise-

ment rebutting the incredulity that Taiwan could produce sophisticated

computers is now almost laughable: four of every five personal comput-

ers now produced by contracted manufacturers are made by Taiwan-

based firms.8

What Is an Emerging Market?

As economic globalization has brought down trade and investment barri-

ers and has connected far-flung countries in integrated global supply

chains—and emerging markets seem to be converging with the world’s

“rich industrial countries”—distinguishing these economies from devel-

oped markets may seem to matter less than before. We disagree. One fun-

damental premise of this book is that businesses still need to distinguish

emerging markets—collectively from developed markets and individu-

ally from each other.

But what, really, is an emerging market? The term emerging markets

was coined by economists at the International Finance Corporation

(IFC) in 1981, when the group was promoting the first mutual fund

investments in developing countries.9 Since then, references to emerging

markets have become ubiquitous in the media, foreign policy and trade

debates, investment fund prospectuses, and multinationals’ annual

reports, but definitions of the term vary widely (see table I-1).

The term is often reduced to the unhelpful tautology that emerging

markets are “emerging” because they have not “emerged.” To understand

emerging markets, we need to consider carefully the ways in which they

are emerging and the extent to which they are genuine markets.

4 | Winning in Emerging Markets

If you ask a conference room full of business executives how they

would distinguish emerging markets from developed economies, variants

of three stories will likely arise. Emerging markets such as Brazil, China,

India, and Russia, some will certainly say, are emerging by virtue of their

recent fast economic growth. The opening of these large economies to

global capital, technology, and talent over the past two decades has fun-

damentally changed their economic and business environments. As a

result, the GDP growth rates of these countries have dramatically out-

paced those of more developed economies, lifting millions out of poverty

and creating new middle classes—and vast new markets for consumer

products and services. Large, low-cost, and increasingly educated labor

pools, meanwhile, give these markets tremendous competitive advantage

in production, and information technology is enabling companies to

exploit labor in these markets in unique ways.10

Other executives will focus on emerging markets as emerging com-

petitors. On the macro level, a landmark Goldman Sachs report pub-

lished in 2003 forecast that the economies of Brazil, China, India, and

Russia could grow to be collectively larger than the G-6 economies

TA B L E I - 1

Frequently used criteria for defining emerging markets

Category Criteria

Poverty Low- or middle-income country

Low average living standards

Not industrialized

Capital markets Low market capitalization relative to GDP

Low stock market turnover and few listed stocks

Low sovereign debt ratings

Growth potential Economic liberalization

Open to foreign investment

Recent economic growth

Source: Standard & Poor’s; International Finance Corporation; Trade Association for the Emerging Markets; J. Mark Mobius, Mobius on Emerging Markets (London: Pitman Publishing, 1996), 6–23.

Introduction | 5

(United States, Japan, United Kingdom, Germany, France, and Italy)

in U.S. dollar terms before the middle of the twenty-first century.11

Commentator Fareed Zakaria sees this “rise of the rest” as a transforma-

tive, tectonic shift in the distribution of global power.12 Companies

based in these economies, meanwhile, are already challenging multina-

tionals based in the developed world—and not only in their home

emerging markets. China-based Lenovo’s purchase of IBM’s personal

computer business in 2004 and the acquisition of Jaguar and Land

Rover by India’s Tata Motors in 2008 are only two examples of the

increasing global mergers and acquisitions activity by emerging market-

based firms. Some observers see the financial crisis of 2008–2009 as an

inflection point, accelerating the emergence of these markets as domi-

nant players in the global economy.

A deeper discussion might elicit a list of the persistent headaches

of doing business in emerging markets. These markets, the executives

might say, are prone to financial crises. Intellectual property rights are

insecure. Navigating government bureaucracies can be thorny. Product

quality is unreliable. Local talent is insufficient to staff operations. Reli-

ably assessing customer credit is difficult. Overcoming impediments to

distribution can be frustrating. Sorting through investment opportuni-

ties or performing due diligence on potential partners is often a guessing

game. Others might throw up their hands and say that corruption is so

endemic in emerging markets that the risks simply outweigh the poten-

tial rewards.

Based on many of these signs of emergence, some might say, emerging

markets are not distinctly different from other markets; rather, they are

simply starting from a lower base and rapidly catching up. Indicators such

as the growing numbers of emerging market-based companies listed on

the New York Stock Exchange or the growing ranks of billionaires from

emerging markets listed annually by Forbes illustrate this trend.13 Behind

those indicators, however, is a more complicated story of why firms based

in these economies have sought out overseas listings and how those moguls

have amassed fortunes in developing countries that are, by many stan-

dards, still quite poor.

6 | Winning in Emerging Markets

All these criteria—the indicators of opportunity and the causes for

complaint—are important features of many emerging markets, but they

do not delineate the underlying characteristics that predispose an econ-

omy to be emerging, nor are they particularly helpful for businesses that

seek to address the consequences of emerging market conditions. We

see these features of emerging markets as symptoms of underlying mar-

ket structures that share common, important, and persistent differences

from those in developed economies.

A fundamental premise of our work is that emerging markets reflect

those transactional arenas where buyers and sellers are not easily or effi-

ciently able to come together.14 Ideally, every economy would provide a

range of institutions to facilitate the functioning of markets, but developing

countries fall short in a number of ways.15 These institutional voids make a

market “emerging” and are a prime source of the higher transaction costs

and operating challenges in these markets. By relying on outcome criteria

to assess markets, managers often overlook the ways in which emerging

markets operate differently than do developed economies. Ranking the

world’s economies by per capita gross domestic product would suggest that

the United Arab Emirates, for example, is among the world’s most devel-

oped economies, but it is an emerging market nonetheless because of its

market structure.

Intuitively, managers know that operating a business in an emerging

market is different from doing so in a developed economy. It is tempting

to chalk up these differences simply to country context. Indeed, market

structures are the products of idiosyncratic historical, political, legal,

economic, and cultural forces within any country. All emerging markets

feature institutional voids, however, although the particular combina-

tion and severity of these voids varies from market to market.

An Actionable Framework

The chapters in this book identify ways in which the uniqueness of

emerging markets is shaping the business opportunities and challenges

in these economies. We offer a simple actionable framework to help

Introduction | 7

managers map the institutional context of any emerging market. By

developing a granular understanding of the underlying market structure

of emerging economies—and not only cataloging symptoms to be incor-

porated in an overall risk assessment—companies can tailor their strate-

gies and execution in emerging markets to avoid mistakes and outcompete

rivals. Familiarity with the framework and toolkits in this book can help

organizations address key questions:

• In this particular market, which market institutions are working,

and which institutions are missing?

• Which parts of our business model can be adversely affected

by these institutional voids?

• How can we build competitive advantage based on our ability

to navigate institutional voids?

• How can we profit from the structural reality of emerging mar-

kets by identifying opportunities to fill voids, serving as market

intermediaries?

In part I of this book, we unpack our structural definition of emerging

markets by examining the institutional anatomy of these economies. In

part II, we apply this framework to the challenges facing various actors as

they manage in these contexts: companies filling voids as intermediaries;

multinationals based in developed markets; and domestic companies

based in emerging markets, which we call emerging giants.

Companies of various stripes face similar strategic choices as they

respond to institutional voids in emerging markets.

Replicate or adapt? Institutional voids invariably challenge the execu-

tion of business models in emerging markets. Businesses need to deter-

mine the extent to which business models can be replicated in emerging

markets or adapted to fill institutional voids. Multinationals need to weigh

the extent to which they can transfer business models cultivated in devel-

oped markets to emerging economies rife with institutional voids or deter-

mine how they should adapt. Local companies with global aspirations

8 | Winning in Emerging Markets

can learn from the business models of developed market-based multina-

tionals but also can exploit their local knowledge by developing models

based on their intimate understanding of institutional voids in their

home markets.

Compete alone or collaborate? Developed market-based multinationals

and emerging market-based companies each bring inherent advantages

to bear in emerging markets, but each might also gain from collabora-

tion with other parties. Multinationals bring brands, capital, talent, and

other resources to emerging markets, and yet their track records in these

economies have been mixed. Local knowledge is a particularly valuable

asset for firms to exploit in navigating institutional voids, and multina-

tionals need to decide whether some form of collaboration with a local

player makes sense for their business. Sharing is a two-way street in

such collaborations, however, and multinationals need to weigh the

benefits of local knowledge against the risk of empowering a partner that

could turn into a well-trained and well-informed competitor. Local com-

panies can exploit their inherent advantage in navigating institutional

voids as a source of competitive advantage vis-à-vis incoming multina-

tionals, but these firms can gain capabilities and credibility through

global partnerships.

Accept or attempt to change market context? Businesses operating in

emerging markets can take the institutional contexts of these markets as

a given or can work actively to change them by filling institutional voids.

Multinationals based in developed markets can either sidestep voids as

best they can or strive to fill them in service of their businesses. Given

regulatory constraints and other sensitivities, however, it can be difficult

for multinationals to fill some voids in emerging markets. Local compa-

nies are in some ways better equipped than multinationals to operate

amid institutional voids, but they also can exploit their local knowledge

to fill voids and create a barrier to entry and expansion by foreign com-

petitors. As we discuss in chapter 3, changing market context can be an

entrepreneurial opportunity in its own right for intermediary-based

businesses that fill institutional voids.

Introduction | 9

Enter, wait, or exit? Based on an assessment of institutional voids, compa-

nies need to decide whether to enter and operate in an emerging market, to

wait and emphasize opportunities elsewhere, or to exit if they are already in

the market. Multinationals can bring their global capabilities to bear in an

emerging market or say, “Not now” if the challenges posed by institutional

voids are too daunting. Exercising the option to wait is relatively easy for

multinationals, because they can choose where to compete and have the

resources to move to different markets. Although not entering is not an

option for local companies based in emerging markets, these firms do have

an exit option. Local companies with capabilities unrewarded in their

home market contexts can say, “Not here” and exit their markets early in

their corporate histories. Exercising this option is difficult for emerging

market-based firms, because often they lack the resources needed to go

global soon after their founding. Emerging market-based companies oper-

ating in different industries might emphasize opportunities elsewhere by

waiting to enter a particular industry where institutional voids are more

serious obstacles.

Overview of This Book

Part I (chapters 1 and 2) describes the importance of market intermedi-

aries to businesses in all markets and offers a toolkit for companies operat-

ing in emerging markets to spot and respond to institutional voids (see

figure I-1). Part II begins, in chapter 3, by looking at how companies can

see voids as entrepreneurial opportunities and examines the challenges of

building intermediary-based businesses in emerging markets. Chapters 4

and 5 then discuss how developed market-based multinationals and

emerging giants from a wide range of industries, operating in a wide range

of contexts, have wrestled with the strategic choices above to compete in

emerging markets. Chapter 6 looks at how the institutional contexts of

emerging markets shape the globalization journeys of emerging giants. We

conclude the book in chapter 7 by summarizing an agenda for companies

to use in developing and deploying strategies that fit emerging markets.

10 | Winning in Emerging Markets

F I G U R E I - 1

Book structure and organization

Chapter 2: Spotting and Responding to Institutional Voids

Chapter 1: The Nature of Institutional Voids in Emerging Markets Part I:

Conceptual Introduction

Introduction

Chapter 6: Emerging Giants: Going Global

Chapter 5: Emerging Giants: Competing at Home

Chapter 4: Multinationals in Emerging Markets

Chapter 3: Exploiting Institutional Voids as Business Opportunities

Part II: Applications

Chapter 7: The Emerging Arena

Five

Emerging Giants: Competing at Home

UNSHACKLED BY economic liberalization, entrepreneursand domestic companies in emerging markets are aggres- sively pursuing growth opportunities at home and overseas.1 Alongside

the fast economic growth of their home markets, successful emerging

market-based companies are flourishing, regularly registering double-

digit annual revenue growth and figuring prominently in global deal

making.

Globalization and liberalization have also intensified competition in

these firms’ home markets as multinationals from developed markets enter

with all the advantages outlined in chapter 4: established global scale,

brands, technology, financial muscle, talent, and organizational capabili-

ties. Beyond foreign competition, emerging market-based firms have faced

each other in tough local competition and have confronted the challenges

of institutional voids in their home markets—voids that frustrate their

access to talent, technology, and capital. After establishing strong positions

at home, some of these domestic firms have been able to access global

capital, tap in to customer segments outside their home markets, make

acquisitions overseas, and find new partners to develop their businesses.

A small but growing set of these companies has built world-class

capabilities to challenge global rivals in their home countries and even in

developed markets. Cemex (Mexico), Infosys (India), South African

| Winning in Emerging Markets

Breweries (now SABMiller), and China’s Haier Group are all making

marks on international commerce by competing successfully world-

wide. Other companies, such as Bharti Airtel (India), China Light and

Power, Koç Group (Turkey), and Petrobras (Brazil), are viewed as world-

class companies because they have successfully grown their businesses

and defended their turf domestically.

We use the term emerging giants to refer to these successful and globally

competitive companies from emerging economies, which are thriving not

as a result of protectionist regulatory barriers but on the basis of sustain-

able competitive advantage. This chapter looks at how emerging giants are

confronting the strategic choices of responding to institutional voids as

they look to acquire competitive advantage in their home markets.

In an absolute sense, institutional voids are an encumbrance. How-

ever, successful emerging market companies can use the fact that they are

comparatively better placed to circumvent these voids—relative to incum-

bent multinationals—as the thin end of the wedge. Examining the origins

of these firms is useful for developed market-based companies so that

they can understand their rising competition, and for entrepreneurs in

emerging markets to appreciate the models these companies have used to

develop from small ventures into major global firms.

Facing Institutional Voids and Multinational Competition

How have emerging market-based companies grown beyond their still-

developing home market contexts to become globally competitive? The

rapid growth of their domestic markets has helped these firms fast-track

their development, but they have been able to enter the competitive

global arena only by first managing the prevalence of institutional voids

and surviving the entry of multinationals into their home markets.

With the advantages of their global brands and resources, multination-

als can quickly displace domestic companies from the global segment of

emerging markets. Because of institutional voids, emerging market com-

panies often cannot access risk capital and experienced research talent in

their home markets. As a result, it is difficult for them to invest large

sums in, for example, research and development—an investment that is

Emerging Giants: Competing at Home |

critical if these companies are to compete effectively against global giants.

In some emerging markets such as Brazil, India, or Russia, emerging

market companies are also hampered by creaky domestic infrastructure

and unreliable quality in their supply network. Even when emerging

market-based firms are able to circumvent some of these hurdles and put

themselves on a trajectory of rapid growth, they can be stymied by the

shallow pool of domestic management talent.

Emerging market-based companies that choose to take on multina-

tionals can potentially turn the disadvantage of operating in an emerging

market into an advantage, or at least blunt multinationals’ incumbency

advantages of brand name and access to capital and technology. First,

emerging market entrepreneurs have an advantage over foreign multina-

tionals in dealing with local institutional voids because of their experi-

ence and cultural familiarity in dealing with these voids. Institutional

voids hurt all firms operating in markets rife with them, but local firms

often are better able to work around them.

Prospective emerging giants can exploit this relative advantage. Spoiled

by their years of experience in environments having a well-developed

institutional infrastructure, often multinational managers are ill equipped

to deal with the institutional voids that make it difficult to access reliable

market information or structure business partnerships based on reliable

contracts.

Responding to Institutional Voids

Prospective emerging giants face a set of strategic choices to respond to

institutional voids that mirror the choices faced by multinationals.

Because of their home location and unique capabilities, however, emerg-

ing market-based companies have different options to respond (see

table 5-1).

Replicate or Adapt?

Many emerging market-based companies have looked to developed

market-based multinationals as exemplars and have attempted to repli-

cate their models. But often, simply replicating these models does not

| Winning in Emerging Markets

work. Companies that literally replicate business models developed in

foreign contexts often end up paving the way for incoming multination-

als from those foreign markets, which can then enter the market with

more resources and worldwide economies of scale. Instead, success for

emerging market-based companies is rooted in devising and implement-

ing strategies that leverage their understanding of the local context, that

find creative solutions to the challenges of undeveloped hard and soft

infrastructure, and that use these solutions to blunt the edge of incum-

bent multinationals—in brief, adapting through local knowledge.

As described in chapter 4, adaptation is a difficult process, and multi-

national companies often are unable or unwilling to tailor their business

models and strategies to the institutional context and local tastes of each

developing market in which they operate. Local companies can often

access and exploit diffuse local knowledge to tailor their offerings and

operations to a much greater extent than multinationals.

Multinationals’ incumbency advantages can be a disadvantage in local-

ization because they might be particularly reluctant to modify brands,

TA B L E 5 - 1

Responding to institutional voids in emerging markets

Strategic choice Options for emerging market-based companies

Replicate or adapt? • Copy business model from developed markets. • Exploit local knowledge, capabilities, and

ability to navigate institutional voids to build tailored business models.

Compete alone or collaborate? • Compete alone. • Acquire capabilities from developed markets

through partnerships or JVs with multinational companies to bypass institutional voids.

Accept or attempt to change market context?

• Take market context as given. • Fill institutional voids in service of own

business.

Enter, wait, or exit? • Build business in home market in spite of institutional voids.

• Deemphasize home market early in corporate history if capabilities unrewarded there.

Emerging Giants: Competing at Home |

organizational cultures, and cost structures that were designed to derive

strength from their global uniformity. Often less constricted by preexisting

cost structures and organizational processes than developed market-based

multinationals, local companies can often more nimbly incorporate local

knowledge into their business models. Without adaptation, multination-

als often have trouble reaching beyond the global market segment, as

noted in chapter 4. Exploiting their relative advantage in local adapta-

tion can enable emerging market-based companies to target the emerg-

ing middle class seeking global quality products and services with pared

down features at local prices, the traditional segments that accept local

quality at very low cost, and bottom-of-the-market segments that are

looking for goods and services at extremely low cost.

Although replication is not a viable option for prospective emerging

giants, these companies need to decide how to adapt their business mod-

els to the context of their home markets by exploiting local knowledge of

product and factor markets. Product market knowledge is fundamentally

about what goods local consumers need or want and how to produce

and deliver them. Not surprisingly, consumers in emerging markets—

particularly large markets with diverse populations and geographies—

have localized preferences and unique needs. Indigenous companies can

offer value by knowing local customers better and meeting their needs

with desirable, affordable products through adaptation. This local knowl-

edge is a substitute for market research and other intermediaries that are

missing in emerging markets.

Some fast food companies in developing countries, for example, have

built defensible businesses by understanding local tastes and providing

more palatable menu selections than those offered by foreign competi-

tors. Jollibee Foods in the Philippines emerged from the recognition that

Filipinos liked their burgers to have a particular taste. Nando’s started in

South Africa by providing convenient cooked chicken that suited the

local palate. Similarly, Pollo Campero, originating in Guatemala, has

won domestic market share by providing locally palatable roast chicken.

These companies have done battle with larger multinationals and, to

varying extents, have emerged victorious. Further, they have used their

| Winning in Emerging Markets

mastery of the unique tastes of their domestic market customers to

expand globally. Jollibee Foods caters to the tastes of Filipino communi-

ties worldwide, Nando’s can be seen in the United Kingdom and Malaysia

(among other locations), and Pollo Campero has achieved growth

throughout the Americas by targeting Latino communities in El Salvador,

Honduras, Nicaragua, Ecuador, Peru, and Mexico as well as parts of the

United States.

Domestic companies can also exploit their familiarity and experience

with local product market infrastructure, such as unique distribution

channels and logistics networks, that prevail in the absence of developed

market infrastructure. The peculiarities of local product market infra-

structure can be significant barriers to new competitors. Even if compa-

nies are able to introduce a product that consumers want, reaching them

can be cost prohibitive and a business deterrent for foreign-based firms.

South African Breweries (now SABMiller), for example, exploited its

product market knowledge to build an efficient distribution system that

could reach South Africa’s traditional beer-drinking outlets—called

shebeens, or backyard bars—and entrench its brand among local con-

sumers. Developing this system would have been a difficult proposition

for a multinational such as Heineken or Anheuser-Busch. Later in this

chapter, we look at the ways in which India-based Tata Motors has

exploited product market knowledge to adapt its business model in light

of institutional voids.

Factor market knowledge is an understanding of the labor and supply

chain inputs that enable companies to create products or services for

the marketplace. Emerging market-based companies can exploit their

superior ability to identify and manage local talent and resources or

their experience with local supply chains to serve local as well as global

customers.

Emerging markets boast high-quality talent and production resources,

often at significantly cheaper rates than similar talent and resources in

developed markets. Given the institutional voids in emerging markets,

however, it can be difficult and costly for companies from developed

markets to access talent and resources. Multinationals often have trouble

Emerging Giants: Competing at Home |

sorting talent in markets where personnel quality and the reputations of

educational institutions vary widely and where work experience and

training may differ substantially from that available in developed mar-

kets. From a supply chain perspective, operating and managing remote

sourcing and delivery services in regions with relatively poor infrastruc-

ture pose additional challenges to foreign companies.

Emerging market-based companies can leverage their expertise in fac-

tor markets in a number of ways. Later in this chapter, we look at how

Cosan has successfully exploited its knowledge of factor markets in

Brazil’s sugar and ethanol sector.

Compete Alone or Collaborate?

Multinationals entering their home markets are powerful competi-

tors, but they can also be valuable partners for prospective emerging

giants. Emerging market-based companies face a choice parallel to the

one faced by multinationals: compete alone or collaborate? Because

many multinationals are required to collaborate with local firms when

they enter emerging markets, collaboration is often more of a strategic

choice for emerging market-based companies. Collaboration can help

prospective emerging giants acquire new capabilities from developed

markets and add credibility to their organizations, and that can be par-

ticularly valuable in light of institutional voids that challenge their abil-

ity to do so on their own. We look at how two emerging giants—Doğuş

Group of Turkey and Bharti Airtel of India—approached their choices to

collaborate with foreign partners.

Accept or Attempt to Change Market Context?

Beyond adapting to voids, prospective emerging giants are often com-

pelled to invest in developing market infrastructure to fill voids. Filling

voids can be a powerful source of competitive advantage, because foreign-

based multinationals are often less willing to invest in the expensive

proposition of changing the market context.2 Chinese white goods firm

Haier developed into a powerful brand in its home market by filling a

number of institutional voids, as we discuss later in this chapter.

| Winning in Emerging Markets

TA B L E 5 - 2

Case examples

Strategic choice Examples

Replicate or adapt? Tata Motors in India Cosan in Brazil

Compete alone or collaborate? Doğuş Group in Turkey Bharti Airtel in India

Accept or attempt to change market context? Haier in China

Enter, wait, or exit? Software firms in India

Enter, Wait, or Exit?

Developed market-based multinationals have clear exit options from

emerging markets. These firms have the luxury of choosing among any

number of markets in which to invest—and the resources to cover the

cost of mistakes. Emphasizing opportunities elsewhere is a much more

difficult option for entrepreneurs and domestic companies in emerging

markets. Nonetheless, exiting early is an option for companies with mis-

matched and unrewarded capabilities that they cannot exploit amid the

institutional voids of their home markets.

Emerging Giants Competing at Home: Examples

In the rest of this chapter, we look at examples of emerging giants that

confronted these strategic choices in the face of institutional voids in

their home markets (see table 5-2). As in chapter 4, even though each of

these companies has confronted each of these strategic choices, we focus

on the most salient choice for each example. Many emerging giants have

organized themselves as business groups to help confront these choices

in light of institutional voids. We consider the benefits and costs of busi-

ness group organizations for emerging market-based firms at the end of

this chapter.

Emerging Giants: Competing at Home |

Replicate or Adapt? Tata Motors

Tata Motors—part of India’s Tata Group, one of the most successful

emerging market-based business groups—has carefully adapted its

offerings and organization based on institutional voids, particularly with

the development of a new vehicle, the Ace.3 By 2005, Tata Motors had

become India’s largest commercial truck maker but found itself squeezed

amid growing foreign competition in its home market. At the top end of

the market, major foreign truck manufacturers, such as Volvo, were

challenging Tata Motors’ supremacy in large trucks. Producers of pickup

trucks from Japan, Korea, and other countries, meanwhile, were com-

peting against Tata Motors’ smaller commercial vehicles. The low end of

India’s commercial vehicle market was dominated by three-wheelers

made by domestic and foreign companies.

Tata Motors responded to this competitive challenge by exploiting

product market knowledge and adapting business processes with the

development of the Ace, a four-wheeled mini-truck, to target a niche in

the marketplace. The vehicle opened a new segment for Tata Motors,

helping the company reduce the risk of dependence on its main com-

mercial truck business, which was highly cyclical.

The Ace was designed in response to market conditions in India and

an unmet consumer need identified by Tata Motors. Three-wheeled vehi-

cles were pervasive as commercial vehicles in India, used to ferry produce

and merchandise to rural markets and deliver goods in urban centers,

some of which limited access to larger commercial trucks to ease conges-

tion. Despite their low price and nimbleness, however, three-wheelers

were unsafe, slow, and frequently overloaded. Reliance on the vehicles

often resulted in damaged goods and delayed deliveries. Moreover, three-

wheelers were barred from operating on India’s “golden quadrilateral,”

the new expressway network that linked the country’s largest cities.

The Ace was positioned as a replacement for three-wheelers. It had a

comparable payload size and price point but offered many of the benefits

of larger light commercial vehicles to serve the “last mile” of distribution

| Winning in Emerging Markets

in India’s congested cities. The truck was designed to be the only vehicle

in India allowed on all roads. Although the initial cost of the Ace—about

$5,000—was higher than that of three-wheelers, the truck was designed

to be more economical after accounting for its larger payload capacity

and fuel costs. Tata Motors designed the Ace to meet higher safety stan-

dards than existing requirements and norms in India. The move put Tata

Motors in a stronger position than competitors if higher standards were

adopted by Indian regulators and would also facilitate the vehicle’s entry

into international markets having higher standards already on the books.

The Ace was unique not only in its concept but also in the ways in

which Tata Motors adapted the execution of the project to meet the vehi-

cle’s target price point and reach its target customers. Tata Motors con-

ducted extensive market research through interviews with potential

customers to identify their needs and constraints, helping the company

refine the Ace’s design, pricing, and features—and substituting for absent

market research intermediaries. The company looked at the product

through the eyes of its customers, incorporating, for example, realistic

expectations about overloading, a common practice in poor, populous

countries.

Meeting the project’s tight budget—to enable the Ace to be positioned

at such a low price point—forced Tata Motors to be innovative in prod-

uct development and procurement. The company employed a cross-

functional team for product development and adopted a Japanese-style

production preparation process (3P), which incorporated suppliers and

other stakeholders earlier in the development process. Aggregate out-

sourcing, e-sourcing, and the use of existing production facilities also

helped lower costs.

Because it blurred the lines of existing product segments, successfully

introducing the Ace required Tata Motors to educate the marketplace.

After listening to customer guidance through the product development

process, the company needed to invest in customer education to stoke

demand for the Ace, particularly because of the truck’s operating eco-

nomics. To ease concerns about the Ace’s high initial cost, the company

offered financing through its consumer finance arm. This action filled a

Emerging Giants: Competing at Home |

void, because auto financing was a relatively new practice in India—and

almost unknown among customers in the Ace’s target market.

Tata Motors also adapted its distribution and after-sales service oper-

ations for the Ace to meet the needs of the vehicle’s target customers.

Many of the Ace’s cost-conscious potential customers in rural areas

might not be willing to travel long distances to see the vehicle, so the

company deployed a new bare-bones dealership format that would

bring the Ace closer to these customers without incurring the expense of

a new network of full-service dealerships. Similarly, instead of building

an expensive new network of service centers, the company trained local

mechanics and gave them tools to take care of common problems. Vehi-

cles would be sent to larger urban service centers only in the event of

major repairs or accidents.

Less than a year after the Ace’s introduction in May 2005, Tata Motors

had already sold thirty thousand units even though the vehicle was

available in only one-quarter of the country. A survey of Ace purchasers

found that more than half were buying their first commercial vehicle,

suggesting that the product had expanded the existing commercial vehi-

cle market. “It is no more a niche product,” said one company executive.

“It has created a category by itself. What we are trying to create through

this is . . . businessmen and entrepreneurs, who will come into the trans-

portation business. That is the key driver of demand creation that we are

looking at.”4

Because demand surpassed the capacity of the existing plant where the

Ace was initially produced, Tata Motors established a new plant in north-

ern India to produce the Ace and related vehicles with a capacity of

250,000 vehicles. The company also introduced the vehicle in Sri Lanka,

Nepal, and Bangladesh, with an eye to introducing the Ace in still other

developing markets. Similarly, Tata Motors exploited local knowledge to

target a difficult market segment with the development of the Nano, a

$2,500 “people’s car” introduced in 2008.

Tata Motors successfully exploited local knowledge in conceptu-

alizing the Ace and adapted to institutional voids to deliver the product

(see table 5-3). However, the company’s market opportunity with this

| Winning in Emerging Markets

TA B L E 5 - 3

Tata Motors in India: Responding to institutional voids

Spotting voids question Specific void Response

Can companies easily obtain reliable data on customer tastes and purchase behaviors? Are there cultural barriers to market research? Do world- class market research firms operate in this country?

Underdeveloped sector of market research providers (product market information analyzers and advisers)

Adapted: Interviewed poten- tial customers internally and incorporated results into Ace design and pricing

Do large retail chains exist in the country? If so, do they cover the entire country or only the major cities? Do they reach all consumers or only wealthy ones? How strong are the logistics and transportation infrastructures?

Underdeveloped dealer networks (product market aggregators and distributors); difficult for rural customers to travel to dealerships in urban cen- ters (hard infrastructure)

Adapted: Established basic dealerships to bring Ace “showroom” closer to rural customers unwilling or unable to travel to cities to see Ace models

Are consumers willing to try new products and services? Do they trust goods from local companies? How about foreign companies?

Underdeveloped consumer information providers (product market information analyzers and advisers)

Adapted: Invested in customer education to show value proposition of the Ace

Do consumers use credit cards, or does cash dominate transactions? Can consumers get credit to make purchases? Is data on customer creditworthiness available?

Limited sources of capital for target customers (product market transaction facilitators)

Adapted: Offered financing for Ace through consumer finance arm

How do companies deliver after-sales service to consumers? Is it possible to set up a nationwide service network?

Underdeveloped vehicle service network (product market aggregators and distributors)

Adapted: Trained and provided tools to local mechanics for common problems

product was closely tied to the state of India’s infrastructure at the time

of its introduction. The company’s success with the Ace soon attracted

other companies—both foreign and domestic—to develop similar vehi-

cles for India. By filling the void of India’s underdeveloped market

research intermediaries for its own product development, Tata Motors

served as a market researcher for its competition.

Emerging Giants: Competing at Home |

Importantly, however, Tata Motors has a head start in the segment,

and, perhaps more critically, execution was critical to the success of the

Ace. The company’s innovative procurement process and investments in

developing the ecosystem for the vehicle through its distribution and

service operations could help Tata Motors sustain competitive advantage.

Replicate or Adapt? Cosan

Cosan has exploited its ability to adapt to the institutional voids in the

factor markets of Brazil to emerge as one of the world’s leading sugar and

ethanol producers. The Brazilian government had closely regulated

prices, production, and purchase of sugar and ethanol, but after deregu-

lation in the 1990s, the industry took off, enabling companies such as

Cosan to exploit the country’s inherent advantages in sugar and ethanol

production conferred by its climate and soil.5

Cosan emerged from a competitive landscape in Brazil dominated by

small and inefficient family-run businesses, particularly in the 1980s

before deregulation.6 The company had grown in the fragmented sugar

and ethanol sectors mostly through acquisitions—particularly after

deregulation—increasing its production efficiency through economies

of scale.7 With a 9 percent share of Brazil’s sugar market and 7 percent of

its ethanol market, Cosan was the country’s largest producer of both as

of June 2009.8 (As of December 2007, Cosan’s next-largest rival held a

4.3 percent share and others held shares of around 2 percent.)9

In 2007, Cosan raised more than $1 billion in an initial public offer-

ing (IPO) on the New York Stock Exchange, the first Brazilian biofuel

firm to do so.10 The company planned to use the proceeds of the public

offering to continue expanding through acquisitions and some green-

field projects.11 “The message they are giving now is they want to be

consolidators, not acquired,” said one stock analyst.12

More recently, foreign-based multinationals have been eager to tap in to

the opportunities of Brazil’s growing biofuel sector.13 The attractiveness of

the sector to large multinationals compelled Cosan to restructure its cor-

porate organization to prevent an unwanted takeover, enabling founder

Rubens Ometto Silveira Mello to maintain control of the company. “If he

| Winning in Emerging Markets

gave up voting control, boom, they would get taken out,” one stock ana-

lyst said.14 Cosan saw some benefits from the entry of large multination-

als in consolidating the sector. As one company executive noted, “We

have 350 players in Brazil. It would be better to have 20 of those com-

panies expanding in the market because the discipline of those guys is so

much better.”15

Operational know-how and a willingness to invest in systems sur-

rounding its production facilities were critical for Cosan to differentiate

itself from its local and incoming foreign competition. “We manage the

society around the mill, which is key,” said one company executive.

“We are an agricultural business. We plant, we fertilise, we raise cane, we

cut cane, we operate the plants, we do everything. These major agribusi-

nesses, they don’t do agriculture. They buy and sell supplies.”16 Most of

the institutional voids in Cosan’s business remain upstream, so these

capabilities have been persistent sources of competitive advantage vis-à-

vis foreign agribusiness giants and oil companies targeting the biofuel

market.

Cosan saw its investments in agricultural research and its use of tech-

nology to manage operations as other key sources of competitive advan-

tage.17 Through sophisticated monitoring of crops, production, and soil

quality and process improvements such as in sugarcane washing, Cosan

sought to maximize the efficiency of its operations. The company was

able to bring these efficiency gains to the mills it acquired. Cosan

increased production capacity at Da Barra from 79 tons of sugarcane at

the time of acquisition in August 2002 to 894 tons in 2008–2009.18

Cosan’s expertise at managing acquisitions—developed amid myriad

institutional voids immediately after deregulation—have remained a key

source of competitive advantage for the company.

A large share of sugarcane production in Brazil relied on contracted

labor to cut the sugarcane by hand. Working conditions for these labor-

ers had been a frequent source of criticism. In 2007, Cosan became the

largest producer—and among the first—to agree to eliminate out-

sourced labor in response to these concerns.19

Emerging Giants: Competing at Home |

In addition to acquisitions, Cosan pursued brownfield projects in the

productive but competitively crowded São Paulo region, and greenfield

developments inland. “[W]e need a place without sugar mills,” one com-

pany executive explained, “a place where we can develop sugarcane

fields surrounding the plants, to create clusters that act as a system. Hav-

ing mills in a cluster reduces the cost of transportation to the mills and

reduces the energy consumption.”20

Some 85 percent of Brazil’s ethanol production was sold through five

distributors, giving these firms strong bargaining power.21 Ethanol pro-

ducers also bore the costs of transporting fuel from their facilities to dis-

tribution centers and then back to retail chains for final distribution.22

As a result, Cosan sought to become the country’s first integrated ethanol

company.23 Cosan bought a chain of fifteen hundred Esso filling stations

from Exxon in 2008, making it the first major producer to move into

retail distribution.24 “We wanted to secure our access to consumers, and

this deal gave us the necessary scale,” said one company executive.25

The deal came as many major oil companies sought to move upstream

into biofuel production.26 Cosan saw its local knowledge and experience

as key competitive advantages vis-à-vis incoming foreign multinationals.

“[Y]ou have to deal with workers, unions, climate conditions, judges,

cities and priests,” one company executive said. “That is not very easy

for any company to do, and it’s an expertise that you have to develop

over time. As a Brazilian, I can understand the culture better than an

American or European. If I come to Europe to buy a wheat mill, it won’t

be easy either. I have to deal with the French Union that have a strong

lobby. It requires experience.”27 Cosan’s growth and development in

Brazil illustrate how emerging market-based companies can exploit their

ability to navigate factor markets to build competitive advantage against

both local and foreign competition (see table 5-4).

Prospective emerging giants often face the question of whether to col-

laborate with multinationals or to compete against them alone. As we

discuss next, Bharti Airtel of India and Turkey’s Doğuş Group pursued

collaborations with foreign firms at different stages of their corporate

| Winning in Emerging Markets

histories. Their foreign partners provided capital, operational capabili-

ties, strategic advice, and valuable connections to other global resources.

The two companies sought partners that would also improve and signal

the credibility of their organizations.

Compete Alone or Collaborate? Bharti Airtel in India

Established as a start-up by entrepreneur Sunil Mittal and with more

than $5 million in annual sales by 1992, Bharti Airtel grew into one of

India’s largest telecommunications providers, with a market capitaliza-

tion of $31.8 billion by 2008.28 The company’s partnerships with a

range of foreign firms over the course of its history were central to Bharti

Airtel’s ability to grow in a capital-intensive industry and take on tough

competition from state-owned enterprises and well-funded offshoots of

powerful business groups. Foreign partners helped Bharti Airtel in its

TA B L E 5 - 4

Cosan in Brazil: Responding to institutional voids

Spotting voids question Specific void Response

Can companies access raw materials and components of good quality? Is there a deep network of suppliers? Are there firms that assess suppliers’ quality and reliability? Can companies enforce contracts with suppliers?

Limited ability to sort suppliers (factor market information analyzers and advisers; credibility enhancers)

Adapted: Invested in quality through technology and process improvements, and scale through acquisitions to differentiate business in fragmented sector

How strong are the logistics and transportation infrastructures? Have global logistics companies set up local operations?

Underdeveloped logistics and transportation infrastructure (product market aggregators and distributors)

Adapted: Sought to build out fully integrated operations

How are the rights of workers protected? If a company were to adopt its local rivals’ or suppliers’ business practices, such as the use of child labor, would that tarnish its image overseas?

Poor labor conditions in sugarcane production (labor market regulators and other public institutions)

Adapted: Signed contract to eliminate outsourced labor

Emerging Giants: Competing at Home |

first bid for a cellular service license, and major equity investments by

Singapore Telecom (SingTel) and U.S.-based private equity investor

Warburg Pincus fueled the company’s growth through acquisitions.

Bharti partnered first with Compagnie Générale des Eaux of France,

Mauritian cell operator Emtel, and Mobile Systems International of the

United Kingdom in a successful joint bid for India’s first cellular service

license. Soon after Bharti launched cellular service in Delhi in September

1995, it faced competition from Sterling Cellular, which was controlled

by Indian steel giant Essar.

Bharti quickly learned how to compete against rivals having more

resources. The company targeted small business owners and retail cus-

tomers instead of the corporate market, where larger business groups

would have an advantage. Although business group organizations can

bring advantages to emerging market-based firms—as we discuss later

in this chapter—Bharti exploited its focus. As a company executive

noted, “We were lucky not to carry the baggage other players had of

their existing businesses. I was often told this was a disadvantage, as I

did not have the same resources as they. As you can see, that has been

proved wrong. Often there were very strong temptations to start other

businesses—we almost started an airline at one point. But every time we

braced ourselves and said no. Today our focus has been our greatest

asset.”29 (Bharti Enterprises, organized as a business group, later entered

the retail, life insurance, and other sectors in India.)

Italian state-owned telecom operator STET invested $58 million in

Bharti in 1996, and, from 1997 through 1999, British Telecom (BT)

made $250 million in equity investments.30 BT also helped Bharti

improve its operations by providing assistance in corporate communica-

tion, lending technology support, and extending procurement benefits

to Bharti through its own vendor network. Importantly, Bharti main-

tained management control in the partnership. “Despite its size, our

partnership is one of equals and the inputs which we receive are tremen-

dous,” noted a Bharti executive.31

In 1995, a second tranche of cellular service licenses came up for auc-

tion, but Bharti did not bid high enough for the desirable locations. The

| Winning in Emerging Markets

winning bids turned out to be too high and unsustainable for some new

entrants. Bharti wanted to expand through acquisitions, but it needed

more capital. In 1999, Warburg Pincus purchased a 20 percent stake in

Bharti for $60 million. The following year SingTel invested $400 mil-

lion, and in 2001, Warburg Pincus and SingTel each invested an addi-

tional $200 million. Bharti received smaller investments from New York

Life Insurance, Asian Infrastructure Fund Group, and International

Finance Corporation.

Bharti was still a relatively small operation when it attracted these

major investments. As the only profitable cellular service provider in a

market tipped for stunning growth, Bharti presented investors with sig-

nificant upside potential. An executive at Warburg Pincus also noted the

quality of the company’s management and the strength of its consumer-

focused model compared with those of its competition:

We were willing to bet big on Bharti because we saw the right

strategy, the right team and the right focus. We were impressed by

Sunil Mittal’s vision, his deep domain expertise, and the quality of

his management team. In spite of his accomplishments, we saw a

man who was willing to learn, to listen, and to change—he does

not pretend that he knows it all. It is not easy to find these quali-

ties in an entrepreneur. Our business is about backing people,

and Bharti is a very good example of this strategy.32

Partnering with investors such as Warburg Pincus and SingTel offered

Bharti more than just capital. The business groups with which some of

Bharti’s toughest competitors were affiliated had access to capital, politi-

cal support, and deeper wells of management talent, as well as valuable

reputations. Investments from global players offered signals of credibil-

ity that helped Bharti neutralize some of these advantages.

Warburg Pincus and SingTel offered other resources and advice that

helped Bharti build its business. Three representatives of SingTel and

two Warburg Pincus partners sat on Bharti’s thirteen-person board.

Bharti and SingTel jointly built an underwater cable network linking

Emerging Giants: Competing at Home |

Bharti’s domestic voice and data network to SingTel’s global network.

Warburg Pincus offered significant strategic advice on Bharti’s geo-

graphic expansion, acquisition approach, financing, and operations.

“Warburg Pincus let us think big,” said a Bharti executive.33 Warburg

Pincus helped persuade Bharti to acquire existing operations—even

those not fully meeting the company’s high standards—and to look

beyond northern India to craft a pan-India strategy to tap in to opportu-

nities in the wealthier south.

Bharti went public in 2002, listing 10 percent of its shares on the

National Stock Exchange, and subsequently has raised capital through

loans and other facilities. By 2005, Warburg Pincus had earned $1.1 bil-

lion by selling two-thirds of its stake in Bharti—“one of the very best

deals in the firm’s history,” according to a Warburg Pincus executive.34

Bharti’s early foreign partnerships helped nurture its growth with

much-needed capital, resources, and strategic advice. Risk capital is

important to the development of any young company. Bharti’s partner-

ships were particularly valuable because of the institutional voids in its

home market and the deeper expertise and richer resources—such as

the connection to SingTel’s global network—it gained from foreign part-

ners than would be possible to access locally (see table 5-5). These capa-

bilities and resources helped Bharti combat the inherent advantages of

state-owned and business group-affiliated rivals and grow into one of

India’s largest telecom service providers. These foreign partnerships sig-

naled credibility to the outside world, but accessing them required

Bharti to demonstrate not only a highly promising business model and

successful track record but also credibility in its management and

corporate governance—a lesson for any emerging market-based firm

looking for help from overseas.

Compete Alone or Collaborate? Doğuş Group in Turkey

In 2005, Doğuş Group, one of Turkey’s largest business groups,

sought out a foreign partner to improve the competitiveness and capa-

bilities of its flagship financial services company, Garanti Bank.35 Doğuş

Group had restructured itself in the early 2000s in response to economic

| Winning in Emerging Markets

crisis in its home market and incoming foreign competition. As part of

the restructuring, the group streamlined its portfolio and worked to

institutionalize standards across the fairly autonomous group operating

companies.

Garanti Bank exemplified the restructured group’s concentration on

consumer- and marketing-focused businesses. Garanti had developed a

strong brand and was a leader among Turkish banks in incorporating IT

into its financial services offerings. By the time Garanti considered an

international partnership in 2005, the bank had more than $20 billion

in assets and was Turkey’s third-largest private bank.36 Foreign banks

had a small but growing presence in Turkey at the time. As of June 2004,

foreign-owned banks accounted for a 2.6 percent market share in assets,

4.1 percent of loans, and 2.5 percent of deposits.37 In early 2005, BNP

TA B L E 5 - 5

Bharti Airtel in India: Responding to institutional voids

Spotting voids question Specific void Response

Does a venture capital industry exist? If so, does it allow individuals with good ideas to raise funds? Can companies raise large amounts of capital in the stock market? Is there a market for corporate debt?

Underdeveloped capital- providing intermediaries (capital market aggregators and distributors; transaction facilitators)

Collaborated: Sought out foreign partners for capital (as well as access to global resources and strategic advice)

Are consumers willing to try new products and services? Do they trust goods from local companies? How about foreign companies?

Underdeveloped consumer information providers (product market information analyzers and advisers)

Collaborated: Foreign partners helped build credibility for customers who might have opted for the reassurance of a business group brand name

Do independent financial analysts, ratings agencies, and the media offer unbiased information on companies? How effective are corporate governance norms and standards in protecting shareholder interests?

Underdeveloped capital market information providers and certifiers (capital market information analyzers and advisers; credibility enhancers)

Collaborated: Foreign partnerships helped build credibility for future investors when IPO was issued

Emerging Giants: Competing at Home |

Paribas of France and Fortis of Belgium separately bought stakes in

Turkish banks.38

Doğuş sought out a foreign partner for Garanti for a number of rea-

sons. The company hoped to reduce the debt on Garanti’s balance sheet,

join with a foreign entity to expand its business in the region, and insti-

tutionalize corporate governance and other best practices. This latter

advantage of a partnership could bring to Doğuş operational know-how,

such as lean management, and also enable the group to broach sensitive

issues as the family business restructured itself, as a group executive

noted: “Sometimes when you have a third party or a new shareholder,

until that day, things that you couldn’t converse or you couldn’t discuss,

now you can talk about this easier. In the family businesses in emerging

markets, when the businesses are growing, the family, the owner, and

the management become too much like the family and so any criticism

or saying no is taken very much as a personal thing.”39

However, while adding these capabilities Doğuş did not want to jeop-

ardize its existing sources of competitive advantage, particularly Garanti’s

brand and a corporate culture of innovation and fast decision making.

“Everybody was wondering what would be life after such a partnership.

We had to convince them,” said a group executive. “I didn’t want to lose

the culture of the institution.”40 The company also hoped to motivate

employees through training and career development opportunities

offered by a foreign partner.

Doğuş considered offers from multinational banks but ultimately

partnered with GE Consumer Finance in an equal partnership. (Doğuş

sold a 25.5 percent stake in Garanti to GE, half of the Doğuş holding in

the bank.) The international banks that bid for stakes wanted to acquire

majority holdings in Garanti and rebrand the bank.41 “What they will do is

simple,” said a group executive. “They will put down the Garanti sign and

they put up their sign . . . It’s great that these guys have great programs all

around the world, but those programs are one-size-fits-all programs.”42

GE’s bid was not the highest of the partnership contenders, but the

organization offered other benefits to Garanti and Doğuş Group.43 Because

GE was not a bank, it would bring a different perspective to board

| Winning in Emerging Markets

discussions and would look at Garanti differently than would a multina-

tional bank. “In a board, if you had a partnership with XYZ multinational

bank, I think there will be nothing to talk about but the profitability,” a

group executive said.44

As a diversified multinational, GE also offered Doğuş the possibility of

further cooperation in other sectors.45 Doğuş had already partnered with

GE’s CNBC television network in Turkey starting in 1998, and with GE

Real Estate in a joint venture in 2006. Because GE was not a full-service

financial institution, however, the partnership would give Doğuş flexibil-

ity to partner with different companies in other financial services; a group

executive likened the deal to buying an individual vitamin at GNC with

the possibility of buying others, instead of a single multivitamin.46

Since selling the stake to GE, Garanti has pursued regional growth in

Romania while looking to expand in Ukraine, and the partners have

transferred capabilities to each other. “The day after the relationship

started, GE saw a lot more value that they did not see on the paper before,”

a group executive said. Examples of this value included Garanti’s tech-

nology, branding and marketing of credit cards, success with alternative

distribution channels, and use of customer data to offer products

through tellers.47 The Garanti executive who spearheaded the merger of

the three Doğuş-owned banks into Garanti has also transferred to GE as

the company’s head of operations for Europe.48 Garanti has sent employ-

ees to GE training facilities and learned operational capabilities from its

partner. “We are now utilizing lean management, six sigma stuff. We

already started getting results,” said a group executive. “So maybe in cer-

tain things we do not need the McKinseys of this world any more. We

are taking it from our partner—with zero fee.”49

Doğuş Group approached collaboration with a clear view of what it

wanted from its partner. The company sought to preserve Garanti’s

brand—a valuable property in a market that lacked sophisticated product

market information analyzers and advisers—but hoped to use the part-

nership to compensate for other institutional voids in its home market

(see table 5-6). Just as prospective emerging giants—like any company

operating in an emerging market—need to match their capabilities to

Emerging Giants: Competing at Home |

their home market contexts, these firms need to align their collaborations

with the missing capabilities that could help them become more com-

petitive in those contexts.

Accept or Attempt to Change Market Context? Haier in China

In the face of serious institutional voids, adaptation and collaboration

are not enough for many prospective emerging giants.50 Unwilling to

accept the limitations on growth and corporate development imposed

by institutional voids, these companies can work actively to fill these

voids. Haier Group of China emerged as a globally competitive producer

of household appliances by successfully exploiting product market

knowledge and navigating the context of its home market by filling

voids, particularly in distribution and service.

In December 1984, Haier—then named Qingdao Refrigerator

Factory—was a debt-laden operation several months behind in paying

its employees’ salaries. At the time, only 6.6 percent of China’s urban

TA B L E 5 - 6

Doğuş Group in Turkey: Responding to institutional voids

Spotting voids question Specific void Response

Are consumers willing to try new products and services? Do they trust goods from local companies? How about foreign companies?

Underdeveloped consumer information providers (product market information analyzers and advisers)

Competed alone: Kept valuable brand, even within foreign partnership

How strong is the country’s education infrastructure, especially for technical and management training?

Underdeveloped educational and training intermediaries (labor market aggregators and distributors)

Collaborated: Exploited opportunities for training exchanges with foreign partner

How effective are corporate governance norms and standards in protecting shareholder interests?

Underdeveloped corporate governance standards (capital market credibility enhancers)

Collaborated: Used foreign partnership to bring institu- tional best practices to restructuring family-owned company

Are corporate boards inde- pendent and empowered, and do they have independent directors?

Shallow pool of qualified independent directors (capital market information analyzers and advisers)

Collaborated: Sought out foreign partner that could provide strategic advice through seats on board

| Winning in Emerging Markets

households had refrigerators, and the factory was one of China’s three

hundred refrigerator producers, most of whose products exhibited low

standards of quality.51 Despite robustly growing market demand for refrig-

erators as living standards improved in China, Haier resisted mass pro-

duction and instead focused on quality and brand building—a valuable

strategy in a market that lacked well-developed independent credibility-

enhancing intermediaries.

By 2004, Haier dominated its home market with about a 30 percent

share of China’s white goods market and a growing presence in “black

goods” sectors, such as televisions and personal computers. Amid indus-

try consolidation, price wars, and the entry of powerful foreign brands,

Haier built and sustained competitive advantage through innovative and

rapid response to customer tastes and needs, by filling voids in after-

sales service, and by employing efficient distribution.

Compared with foreign and domestic rivals, Haier was particularly

responsive to market demands and was willing to offer differentiated

products to meet customer needs. The company had some ninety-six

product categories and 15,100 specifications, as a result of small feature

innovations and tailored products that were inexpensive to produce—

when incorporated modularly—and were highly valued by customers.

When a customer in a rural area of China’s Sichuan province com-

plained to Haier that his washing machine was breaking down, service

technicians found the plumbing clogged with mud. Rural Chinese were

using the Haier machines—designed to wash clothing—to clean sweet

potatoes and other vegetables. Haier engineers then modified the washer

design to accommodate this use. Since then, Haier washing machines

sold in Sichuan have included a new label: “Mainly for washing clothes,

sweet potatoes and peanuts.”52

To accommodate summer lifestyles requiring frequent changes of

clothing, Haier created a tiny washing machine that cleaned a single

change of clothes. The model used less electricity and water than larger

machines, making it an instant hit in Shanghai. Similarly, the company

designed small refrigerators for urban households where space is at

a premium. Haier’s adaptation through market responsiveness was

Emerging Giants: Competing at Home |

particularly valuable against foreign competition, which was less attuned

to consumer preferences in a market that lacked sophisticated market

research intermediaries.

Most critical to Haier’s success in building a highly competitive

business in its home market were the company’s attempts to change the

market context by filling institutional voids. In after-sales service, Haier

established a service center in Qingdao in 1990 that featured a comput-

erized system to track tens of thousands of customers.53 By 2004, the

company had a service network of fifty-five hundred independent

contractors—one for each sales outlet—who made house calls from

requests to a nationwide hotline. The company even provided temporary

replacements for products undergoing repairs. Offering service that sur-

passed existing norms—and customer expectations—in China helped

Haier differentiate itself and build brand loyalty.

Haier also built a unified, dedicated logistics operation to distribute

its products. Chinese competitors such as Midea and TCL had separate

logistics operations for each product line. Haier’s scale and volume, cou-

pled with consolidated distribution functions, gave the company one of

the lowest logistics costs among competitors—a major advantage. Haier

Logistics, an independently operated company created in 1999, was a

national pioneer, offering just-in-time (JIT) purchasing, raw materials

delivery, and product distribution. Five years after Haier established the

logistics operation, the company had reduced the size of its main raw

materials warehouse from a 200,000-square-meter facility with an

inventory cycle of more than thirty days to a 20,000-square-meter dis-

tribution center with a seven-day inventory cycle, and the company

reduced its roster of suppliers dramatically. Haier set up forty-two distri-

bution centers across China, enabling the company to reach the coun-

try’s interior, and cut the time from order to final product delivery by

more than one-third through the unified operation and information

systems of Haier Logistics.

Haier Logistics provided a critical competitive advantage because of

the institutional voids in China. Establishing a logistics network was

complicated by geographic and bureaucratic obstacles across China’s

| Winning in Emerging Markets

varied terrain, unevenly developed roads and retail networks, and

patchwork of local regulations. In large cities like Shanghai, it was diffi-

cult to find warehouse space large enough to accommodate the huge

trucks required for white goods. In the most remote areas, it was a chal-

lenge to connect warehouses to a company’s information network. Reg-

ulations affecting transportation, such as weight limits for trucks, varied

across regions.

Foreign multinationals were forced to rely on Chinese distributors

and faced high costs and limited coverage in the absence of national

third-party logistics providers. These constraints limited many foreign

brands to China’s more developed eastern coast. Constructing a national

network through multiple logistics providers was difficult and costly,

and those that tried to run their own distribution networks often failed.

Institutional voids made it difficult for Haier to build its business in

China (see table 5-7), but, having circumvented them successfully, Haier

found that voids served as barriers to the aspirations of its competitors.

Competitive advantage is dynamic—particularly competitive advan-

tage built on local knowledge, which can be acquired by rivals over

time, and institutional voids, which tend to be filled over time. Haier’s

early focus on product quality and service standards helped the com-

pany survive consolidation and price wars, but these propositions

become comparatively less valuable as the competitive field is culled and

surviving rivals catch up. Moreover, the development of market institu-

tions that assess product quality—the equivalent of Consumer Reports—

over time makes it easier for new firms to establish credibility that Haier

was able to achieve only over time through significant investments in

brand building. The value of local customer knowledge can diminish

over time as competitors gain experience—particularly foreign firms

with initially steep learning curves—or are able to acquire local expertise

through emulation, partnerships, and use of sophisticated market research

intermediaries. As regulations ease the entry and development of capa-

ble third-party logistics providers with national scope and as the retail

sector matures, the value of dedicated logistics and distribution opera-

tions, such as Haier’s, also can fall. (Chinese retailer Gome Electrical

Emerging Giants: Competing at Home |

Appliances, for example, developed a nationwide footprint of 779 out-

lets across China as of mid-2009.)54

Emerging market-based companies can and should exploit their

knowledge of local product markets and their ability to navigate the

institutional context—even by filling institutional voids—but some of

these advantages can become obsolete as home markets develop.

(Indeed, Haier has seen its share of China’s domestic refrigerator market

TA B L E 5 - 7

Haier in China: Responding to institutional voids

Spotting voids question Specific void Response

Can companies easily obtain reliable data on customer tastes and purchase behaviors? Do world-class market research firms operate in the country?

Underdeveloped market research intermediaries (product market information analyzers and advisers)

Adapted: Exploited access to local knowledge with responsiveness to customer needs in product develop- ment, gaining advantage over competitors lacking access to local knowledge

Can consumers easily obtain unbiased information on the quality of the goods and services they want to buy? Are there independent consumer organizations and publications that provide such information?

Underdeveloped product information and certification providers (product market information analyzers and advisers; credibility enhancers)

Adapted: Instilled focus on quality internally through worker accountability and focus of management

How strong are the logistics and transportation infrastructures? Have global logistics companies set up local operations? Do large retail chains exist in the country? If so, do they cover the entire country or only the major cities? Do they reach all consumers or only wealthy ones?

Underdeveloped third- party logistics and retail infrastructure (product market aggregators and distributors)

Attempted to change market context: Established dedi- cated logistics arm and network of distribution centers across China

How do companies deliver after-sales service to consumers? Is it possible to set up a nation- wide service network? Are third-party service providers reliable?

Underdeveloped after-sales service networks (product market aggregators and distributors)

Attempted to change market context: Established service center with customer tracking, customer service hotline, and network of independent contractors making house calls to customers

| Winning in Emerging Markets

fall from 29.1 percent in 2004 to 25.6 percent in 2006 as a result of ris-

ing domestic and foreign competitors, some of which returned to the

country after learning from early mistakes.)55

Wait, Stay, or Exit? Software Firms in India

In the face of institutional voids or other contextual challenges,

emerging market-based companies can deemphasize their home mar-

kets by avoiding particular sectors or focusing on building global opera-

tions relatively early in their corporate histories.56 An entrepreneur

might decide that a particular emerging market is not ready for a line of

business if it will not be rewarded given the market’s institutional con-

text. A biotech firm might decide that regulations or other obstacles

would stifle its business in an emerging market. Entrepreneurs or busi-

ness groups weighing investments in a wide range of sectors might

decide that a market’s institutional context is not conducive to some

investments—for example, the market simply might not be ready for

private equity or big box retailing.

Software and IT consulting firms in India, such as Infosys Technolo-

gies, Tata Consultancy Services (TCS), and Wipro Technologies, have

exploited India’s labor force to offer IT services worldwide. These firms

have developed globally competitive businesses based on their expertise

and ability to identify, motivate, train, and manage talent. India boasts

an abundance of software talent that is significantly cheaper than similar

talent in developed markets. Given the institutional voids that pervade

the Indian economy, however, it was difficult and costly for companies

in developed markets to access this talent. Indian software companies

developed business models and organizational capabilities that allowed

them to match the talent in India with demand in developed markets.

Although these companies served domestic customers, early in their

histories they focused on opportunities overseas, where these capabili-

ties would be more highly rewarded. At the time that India’s software

and IT consulting firms emerged, most Indian companies were not using

sophisticated IT systems to support their businesses. Moreover, most of

the few Indian companies with IT systems had in-house IT departments

Emerging Giants: Competing at Home |

and were not willing to consider outsourcing. Developed markets offered

deeper pools of customers—and higher price points for IT services than

those same services sold to Indian companies.

Established in India in 1981, Infosys Technologies opened its first

foreign office in the United States only six years later. Ten years after

that, the company opened additional development centers in India and

offices in Canada and the United Kingdom. By 1999, Infosys had

opened offices in Germany, Sweden, Belgium, and Australia as well as

development centers in the United States. The company opened addi-

tional development centers in Canada, Japan, the United Kingdom, and

the United States and, by 2001, offices in France, Hong Kong, the United

Arab Emirates, and Argentina. In 2002–2003, Infosys established sub-

sidiaries in China and Australia and offices in the Netherlands, Singapore,

and Switzerland.

Given abundant access to cheap talent, an initial lack of reputation,

and limited available hardware domestically, many Indian software

providers started at the low end of the market with a “bodyshopping”

model—sending talent into global markets to work on projects at client

sites for significantly lower wages than local programmers. These com-

panies gradually built reputations for reliability and high quality and

began to provide more value-added services. Infosys, for example,

reached a turning point in the mid-1990s when it began to initiate soft-

ware development within India instead of exclusively at client sites. This

was Infosys’s first step toward generating more value for its clients and

protecting its claim on this value.

Although the transition was subtle, the results were monumental. The

company was able to differentiate itself by growing from its baseline

labor-commodity model—selling qualified labor inputs at a low price to

build value into other companies’ businesses. Infosys successfully moved

up the value chain by providing specialized services and solutions that were

designed and managed by highly qualified technical engineers and pro-

grammers. Instead of simply offering cheap and talented—but increasingly

replicable—labor input, the company offered valuable IT services to

clients, moving further up the value chain to providing complete

| Winning in Emerging Markets

turnkey solutions for Fortune 500 companies, most of them based out-

side India (see table 5-8).

Business Groups

While executing any of the strategies discussed here, many prospective

emerging giants have adopted business group organizations to reduce

the costs of institutional voids in their home markets.57 The Ayala Group

in the Philippines, the Koç Group in Turkey, the Tata Group in India,

Luksic Group in Chile, and Grupo Carso in Mexico are among the many

successful emerging market-based business groups that have developed

internal capabilities to deal with institutional voids in their respective

countries. Think of business groups as agglomerations of firms that typ-

ically are legally independent, often diversified across a range of indus-

tries, and tied together to varying extents by formal links (equity ties,

common board members, common brand names) and informal links,

such as control by various members of a family.

As a form of organization, business groups are considered by many

observers in developed Western markets to be anachronistic. This form

TA B L E 5 - 8

Software firms in India: Responding to institutional voids

Spotting voids question Specific void Response

How strong is the country’s education infrastructure, especially for technical and management training? Is data available to help sort out the quality of the country’s educational institutions?

Underdeveloped educational system beyond global tier (labor market aggregators and distributors); under- developed certification intermediaries (labor market credibility enhancers)

Adapted: Exploited local knowledge and developed ability to identify talent

Are consumers willing to try new products and services? Do they trust goods from local companies? How about foreign companies?

Limited business-to- business market for services because sophisticated IT systems not pervasive in India and outsourcing of IT not widely adopted practice

Exited: Sought out customers in developed markets early in corporate histories

Emerging Giants: Competing at Home |

of organization, however, makes sense in emerging markets in light of

institutional voids. When entering a new line of business, group organi-

zations often can bypass the voids faced by another start-up by using the

capital, talent, or reputation built by another business in the group. The

business group can thus serve as a private equity firm, executive search

firm, and branding consultant in a market that lacks a sophisticated

network of these intermediaries.

Ayala Corporation of the Philippines, for example, grew from a family

real estate company into a highly diversified business group with hold-

ings in telecommunications, financial services, IT, and other sectors (see

figure 5-1 for the structure of major Ayala companies). Some of these

firms were publicly traded (shaded gray in the figure).

To oversee the unlisted group companies, Ayala established AC Capital

in 2002. AC Capital functioned somewhat like an internal venture capital

or active investment management firm, filling an institutional void in

Ayala Corporation

Ayala Land (property

developer)

Globe (telecommu-

nication) AC Capital

Manila Water (water services)

IMI (electronics

manufacturing)

Ayala Automotive

(dealerships)

Azalea (IT)

BPI (bank)

F I G U R E 5 - 1

Ayala Corporation business group structure

Source: Ayala Corporation Annual Report 2007.

| Winning in Emerging Markets

risk capital provision. “AC Capital has a distinct mandate, which is to

have a more active management of the emergent businesses,” said Ayala

treasurer Ramón Opulencia. “AC Capital plays the role of an investment

company for them, deciding whether to nurture them or to harvest

value for the corporation.”58 Manila Water Company, one of the compa-

nies nurtured under AC Capital, went public in 2005.59 Ayala’s group

resources and time horizon enabled it to launch Globe Telecom in the

face of steep challenges—high costs, sometimes contentious govern-

ment relations, entrenched incumbents—that would have been much

more difficult for a new entrepreneur to manage.60

A group structure can enable emerging market firms to develop a

corporate brand name that signifies quality, trust, and transparency.

Business groups can help defray the cost of building and maintaining a

brand by spreading it across multiple arms of their businesses. The busi-

ness media in emerging market countries abound with advertisements

that promote group identity rather than merely emphasize the products

or services of individual companies within a group. Once established,

these brands wield tremendous power. Consumers in these countries

value group brands; these groups have an incentive not to damage brand

quality in any one business, because they will pay the price in other

businesses as well.

A business group with a reputation for quality products and services

can use its group name to enter new businesses, even if those businesses

are unrelated to its current product lines. The Korean chaebols are per-

haps most well known for extending their group identity over multiple

product categories. The Samsung brand, for instance, emerged quickly

worldwide as Samsung affiliates produced goods as wide ranging as tel-

evisions, commercial ships, chemicals, mobile phones, and microwave

ovens.61 Many groups in Brazil, China, India, Malaysia, and Turkey have

successfully employed similar strategies of diversification.

Business groups can also exploit their reputations to raise capital in

local stock markets. Diversified groups can point to their track record

of returns to raise money from investors for new ventures. Business

groups also can use their own internally generated capital to grow

Emerging Giants: Competing at Home |

existing businesses, including those too small to obtain capital from

financial institutions, or to enter new industries—in effect acting as

venture capitalists.

Additionally, because of their ability to circumvent local institutional

voids, established local business groups often become partners of choice

for multinationals when they enter emerging markets. Group structures

can also make emerging market companies more attractive to foreign

investors eager to tap in to these fast-growth markets. With few reliable

financial analysts and knowledgeable mutual fund managers to guide

them, outsiders instead turn to diversified groups, which, in turn, invest

in a wide range of industries. Investors trust groups to evaluate new

opportunities and to exercise an auditing and supervisory function—in

effect serving as quasi-mutual funds.

The groups thus become the conduit for large amounts of investment

in their capital-starved countries. When Jardine Matheson—a business

group based in Hong Kong—sought to invest in India, it purchased a

20 percent stake in Tata Industries (the Tata Group’s new business devel-

opment arm) in 1996, giving it exposure to a wide swath of industries

in the country.

Group structures can also help emerging market firms access, attract,

and develop management talent in the still-developing labor markets

of their home countries. Management training intermediaries, such

as business schools, are not well established in emerging markets, and

conglomerate organizations can spread the fixed costs of professional

development over the businesses in the group.

Many of the large groups in India, for example, have internal manage-

ment development programs, often with dedicated facilities. These pro-

grams typically are geared toward developing the skills of experienced

managers. Some groups, however, have instituted training programs

for all levels of employees in an attempt to develop a broad range of

human capital. Some of the Korean chaebols have set up special training

programs in collaboration with top U.S. business schools.

The mobility of talent across industries in emerging markets is

hindered by the absence of executive search firms in these countries. By

| Winning in Emerging Markets

offering opportunities and exposure to management challenges in a vari-

ety of industries, business group affiliates can attract managerial talent

that they would not be able to do as stand-alone entities.

Finally, governments in emerging markets usually make it difficult

for companies to adjust their workforces to changing economic condi-

tions. Rigid laws often prevent companies from laying off employees,

and labor unions insist on job security in the absence of government-

provided unemployment benefits. The internal labor markets of busi-

ness groups can help counteract these rigidities and offer job security in

economies that have few safety nets. When one company in a group

faces declining prospects, its employees can be transferred to other

group companies that are on the rise—even to companies in otherwise

undesirable locations.

Some Indian business groups, for example, have built communities

around their production facilities in remote parts of the country. Because

the group provides services such as schools, hospitals, and places of

worship, and because there will eventually be career options in more

attractive locations when the group is present, managers and other

trained employees are more willing to relocate. The growing companies

benefit by receiving a ready source of reliable employees.62

Groups are also able to put new talent to good use. By allocating talent

to where it is most needed, conglomerates gain a head start in beginning

new activities. Wipro Technologies in India, for example, successfully

moved beyond computers into financial services by relocating skilled

engineers first to computer-leasing services that would make use of their

technical know-how and then to a broad range of financial services. In

contrast, to build their operations, unaffiliated companies usually need to

recruit publicly—a difficult proposition in countries where labor varies

widely in quality and lacks certification from respected institutions.

There are risks, however, for emerging market-based companies that

organize themselves as business groups. Even though internal financing

within business groups offers the obvious advantage of its low cost rela-

tive to funding available through external arms-length sources in mar-

kets that lack specialized financial intermediaries, this funding method

Emerging Giants: Competing at Home |

comes at a potential price. Without the external monitoring provided by

arms-length investors, internal cash flows are more easily diverted to ill-

advised investments.

Consider the experience of Sime Darby, a Malaysian group with inter-

ests spread across Southeast Asia in plantations, manufacturing, con-

sumer products, financial services, and construction.63 In the late 1990s,

Sime Darby expanded into the banking sector, a fast-growing industry in

which the company had relatively little expertise, in a move that arguably

overstretched the group’s competence.64 Group structures can also add

to the cost of raising external financing. The opaqueness of emerging

market companies with complex organizational structures, particularly

those with densely interlocking equity relationships between group com-

panies, can deter external—particularly foreign—financiers.

In mature markets, conglomerates trade at a discount. The empirical

evidence gathered to date seems to suggest that the benefits of group

affiliation outweigh the costs in many emerging markets because of insti-

tutional voids, although the variance can be quite high.65 Whether the

benefits of a group structure outweigh the potential costs is a function of

the quality of the group management. Adapting organizational form

through business group organizations is one way in which prospective

emerging giants can compensate for institutional voids.

Becoming an Emerging Giant

Prospective emerging giants face a raft of challenges as they navigate the

growth opportunities of their home markets, the pressure of new foreign

competition, and the obstacles of institutional contexts (see toolkit 5-1).

Managing institutional voids is tough for prospective emerging giants,

but they are better positioned to manage them than are multinationals.

Moreover, multinationals often are not willing to invest in developing

institutional infrastructure outside their home markets. Prospective

emerging giants can use their ability to identify and manage institutional

voids—and their willingness to invest in filling them—to gain competi-

tive advantage.66

| Winning in Emerging Markets

Collaboration can enable prospective emerging giants to acquire new

capabilities, but these companies should be clear about which capabili-

ties will add value to the company in light of the institutional context in

their home markets. Business group organizations can help emerging

market-based companies execute any response to institutional voids,

but groups present challenges and sometimes costs. After establishing

viable business models, prospective emerging giants face a new set of

challenges as they globalize their businesses, as we discuss in the next

chapter.

Emerging Giants: Competing at Home |

Toolkit 5-1 Toolkit for Emerging Giants Competing at Home

1. Self-Assessment

A. Business Model

What is the core of our business model?

2. Home Market Assessment

A. Defining the Opportunity

What is the opportunity for us in this emerging market?

What pieces of our business model are uniquely defensible from global competition?

B. Market Segmentation

What are the segments within this market opportunity?

What segments do we plan to target?

C. Spotting Institutional Voids

Using the “spotting institutional voids” toolkit, what are the institutional voids in this emerging market (and in these seg- ments)?

How might this emerging market’s institutional voids affect our ability to access our target market segments, particularly vis-à- vis foreign competition?

3. Responding to the Institutional Context

Using the following framework, how should we respond to the institutional voids we have identified in this emerging market?

| Winning in Emerging Markets

Strategic choice Options for emerging market-based companies

Replicate or adapt? • Copy business model from developed markets. • Exploit local knowledge, capabilities, and ability to navigate

institutional voids to build tailored business models.

Compete alone or collaborate?

• Compete alone. • Acquire capabilities from developed markets through

partnerships or JVs with multinational companies to bypass institutional voids.

Accept or attempt to change market context?

• Take market context as given. • Fill institutional voids in service of own business.

Enter, wait, or exit? • Build business in home market in spite of institutional voids. • Exit home market early in corporate history if capabilities

unrewarded at home.

Notes

Introduction

1. Portions of this introduction have been adapted from Tarun Khanna, Krishna Palepu, and Kjell Carlsson, “Why Study Emerging Markets,” Note 5-706-422 (Boston: Harvard Business School, 2007).

2. David Oakley, “Emerging Market Equities Outperform West,” Financial Times (FT.com), June 7, 2009.

3. “Emerging-Market Indicators,” The Economist, January 8, 1994, 102. 4. “Economic and Financial Indicators,” The Economist, January 6, 2007, 81. 5. “The World This Week,” The Economist, January 8, 1994, 5. 6. “The New World Order: Back to the Future,” The Economist, January 8, 1994, 21. 7. The Economist, January 8, 1994, 52. 8. Standard & Poor’s Global Industry Surveys, “Computers: Hardware: Asia,” October

2006, 20. 9. Antoine van Agtmael coined the term. See Antoine van Agtmael, The Emerging

Markets Century: How a New Breed of World-Class Companies Is Overtaking the World (New York: Free Press, 2007), 1–6. Mark Mobius of Franklin Templeton Investments pio- neered equity investing in emerging markets.

10. International outsourcing, or offshoring, has not and may not result in widespread unemployment in the United States and other developed markets compared with the nor- mal churn of jobs in the hurly-burly of competitive, technologically dynamic market economies. It may nonetheless have a transformative impact on the labor markets of devel- oped economies, as Alan Blinder has argued. The accessibility of labor in emerging markets is likely to reshape different service industries in different ways in developed economies, because some highly skilled workers will be vulnerable to emerging market competition while some low-skilled workers in personal services will be less vulnerable. Offshoring to emerging markets could have a profound impact on the educational systems and social safety nets of developed economies as these countries come to terms with preparing their youth to compete in this new landscape and support those who lose out to labor competi- tion based overseas. See Alan S. Blinder, “Offshoring: The Next Industrial Revolution?” Foreign Affairs, March/April 2006, http://www.foreignaffairs.org/20060301faessay85209/ alan-s-blinder/offshoring-the-next-industrial-revolution.html.

11. Dominic Wilson and Roopa Purushothaman, Dreaming with BRICs: The Path to 2050, Goldman Sachs Economics Paper No. 99, October 1, 2003.

12. Fareed Zakaria, The Post-American World (New York: W.W. Norton & Company, 2008).

13. As of April 2009, 168 listings on the New York Stock Exchange were based in countries included in the Morgan Stanley Capital International (MSCI) Emerging Markets

Index; New York Stock Exchange, http://www.nyse.com/about/listed/lc_ny_region.html. The MSCI Emerging Markets Index included 24 countries as of January 2009: Argentina, Brazil, Chile, China, Colombia, Czech Republic, Egypt, Hungary, India, Indonesia, Israel, Jordan, Korea, Malaysia, Mexico, Morocco, Peru, Philippines, Poland, Russia, South Africa, Taiwan, Thailand, and Turkey. In 2008, 300 of the 1,125 billionaires iden- tified by Forbes on its annual list resided in countries included in this index. Forbes iden- tified only 83 billionaires from those countries in 2001 (out of 538) and only 13 in 1987 (out of 141); Luisa Kroll, ed., “The World’s Billionaires,” Forbes, March 5, 2008, http://www.forbes.com/2008/03/05/richest-people-billionaires-billionaires08- cx_lk_0305billie_land.html. See also “The World’s Richest People,” Forbes, July 9, 2001, 110–124; and Harold Seneker, “The World’s Billionaires,” Forbes, October 5, 1987, 82.

14. Adapted from Tarun Khanna and Krishna Palepu, “Why Focused Strategies May Be Wrong for Emerging Markets,” Harvard Business Review, July–August 1997, 41–51.

15. We use the terms emerging and developing interchangeably throughout this book to refer to economies having a variety of transactional challenges or institutional voids.

| Notes50

Chapter 5

1. This chapter is adapted in part from Tarun Khanna and Krishna G. Palepu, “Emerging Giants: Building World-Class Companies in Emerging Markets,” Note 9-703- 431 (Boston: Harvard Business School Publishing, 2005); and Tarun Khanna and Krishna G. Palepu, “Emerging Giants: Building World-Class Companies in Developing Countries,” Harvard Business Review, October 2006, 60–69.

2. See Tarun Khanna, “At Home, It’s Not Just Profits That Matter: The Case for National Ownership,” International Herald Tribune, February 22, 2006, 8.

3. Krishna G. Palepu and Vishnu Srinivasan, “Tata Motors: The Tata Ace,” Case N2- 108-011 (Boston: Harvard Business School Publishing, 2008).

4. Ravi Kant, managing director, Tata Motors, presentation via teleconference to Harvard Business School, September 26, 2007.

5. Jonathan Wheatley, “Brazil Prepares to Grow the Next World Fuel—Moves to Increase the Proportion of Ethanol in Petrol Would Generate a Surge in Sugar Demand, Writes Jonathan Wheatley,” Financial Times, March 9, 2006, 7.

6. Cosan, “Strategy and Competitive Advantages,” http://www.cosan.com.br/en/ir. 7. Ibid. 8. Ibid. 9. “Cosan’s Strategy for Future Growth,” Ethanol Statistics, www.ethanolstatistics.com,

December 10, 2007. 10. Antonio Regalado, “Deals and Dealmakers: Cosan Raises $1.05 Billion in Trading

Debut on NYSE,” Wall Street Journal, August 17, 2007, C5. 11. Antonio Regalado, “Cosan to List Stock in Bid for Growth,” Wall Street Journal,

June 26, 2007, C12. 12. Marcos Paulo, stock analyst with Banco Fator, quoted in ibid. 13. Antonio Regalado and Grace Fan, “Sugar Rush: Ethanol Giants Struggle to Crack

Brazil Market: Family Owners Hesitate to Sell Out to Big Players; Visit from Google Guys,” Wall Street Journal, September 10, 2007, A1.

14. Marc McCarthy, Bear Stearns, quoted in ibid. 15. Marcos Lutz, chief commercial officer, Cosan, quoted in “Cosan’s Strategy for

Future Growth.” 16. Ibid. 17. Cosan, “Strategy and Competitive Advantages.” 18. Ibid. 19. Kenneth Rapoza, “Brazil Sugar Cos Taking Steps to Improve Labor Conditions,”

Dow Jones International News, April 11, 2007. 20. “Cosan’s Strategy for Future Growth,” Ethanol Statistics. 21. Cosan, “Strategy and Competitive Advantages.” 22. Antonio Regalado, “Corporate News: Ethanol Maker Buys Exxon’s Brazil Out-

lets,” Wall Street Journal, April 25, 2008, B4. 23. Cosan, “Strategy and Competitive Advantages.” 24. Jonathan Wheatley, “Cosan Buys Filling Station Chain for $826m,” Financial

Times (FT.Com), April 24, 2008. 25. Paulo Diniz, chief financial officer, Cosan, quoted in Regalado, “Corporate

News: Ethanol Maker Buys Exxon’s Brazil Outlets.” 26. Regalado, ibid. 27. Marcos Lutz, quoted in “Cosan’s Strategy for Future Growth.” 28. Bharti Airtel example derived from Tarun Khanna, Krishna G. Palepu, and Ingrid

Vargas, “Bharti Tele-Ventures,” Case 9-704-426 (Boston: Harvard Business School Pub-

Notes | 51

lishing, 2004); and Tarun Khanna and Krishna G. Palepu, “Teaching Note: Bharti Tele- Ventures,” Teaching Note 5-707-467 (Boston: Harvard Business School Publishing, 2007). Data converted from data at the Bharti Airtel Web site, http://www.airtel.in/ wps/wcm/connect/About%20Bharti%20Airtel/bharti+airtel/investor+relations/overview/.

29. Sunil Mittal, quoted in Indranil Ghosh, “Casting a Wide Net,” Business India, April 3, 2000, 54.

30. “Another First for the Leader,” Business India, June 1, 1998; Amy Louise Kazmin, “Why Phones Are Ringing for Sunil Mittal,” BusinessWeek, December 27, 1999.

31. Sunil Mittal, quoted in Indranil Ghosh, “Casting a Wide Net.” 32. Pulak Prasad, managing director, Warburg Pincus, quoted in Khanna, Palepu,

and Vargas, “Bharti Tele-Ventures,” Case 9-704-426. 33. Sunil Mittal, quoted in Henry Sender, “Bharti’s Stock Price May Not Show Poten-

tial,” Wall Street Journal Europe, April 30, 2002. 34. Dalip Pathak, quoted in Manjeet Kripalani, “Private Equity Pours into India,”

BusinessWeek, June 20, 2005, http://www.businessweek.com/print/magazine/content/ 05_25/b3938158_mz035.htm?chan=gl.

35. Example informed by Tarun Khanna, Krishna G. Palepu, and Richard J. Bullock, “Doğuş Group: Weighing Partners for Garanti Bank,” Case N9-709-401 (Boston: Har- vard Business School Publishing, 2008); Rakesh Khurana, Simon Johnson, and Gina Carioggia, “Taking Charge at Doğuş Holding (A),” Case 9-402-009 (Boston: Harvard Business School Publishing, 2002); and “Doğuş Group: Weighing Partners for Garanti Bank,” Video 9-709-807 (Boston: Harvard Business School Publishing, 2008).

36. Garanti Consolidated Financial Statements, 2005H1, June 30, 2005, http://www.garantibank.com/download/investor_relations/investor/pre_ifrs_h1_05.pdf; BRSA Earnings Presentation, July 22, 2005, www.garantibank.com/download/ investor_relations/presentations/brsa_pres_05_q2.pdf.

37. ING Sector Review Turkish Banks, December 3, 2004. 38. Piraye Kuranei, “Foreign Banks Poised to Invest in Turkish Banking Sector,”

Mondaq Business Briefing, March 2, 2005; “Fortis to Acquire Turkey’s Disbank,” Reuters News, April 12, 2005.

39. Ferit Şahenk, chairman, Doğuş Group, interview with author, April 10, 2008. 40. Ibid. 41. Ibid. 42. Ferit Şahenk, “Doğuş Group: Weighing Partners for Garanti Bank,” video. 43. Ibid. 44. Ibid. 45. Ferit Şahenk, interview with author. 46. Ferit Şahenk, presentation at Harvard Business School. 47. Ferit Şahenk, interview with author. 48. Ibid. 49. Ferit Şahenk, “Doğuş Group: Weighing Partners for Garanti Bank,” video. 50. Haier example derived from Tarun Khanna, Krishna G. Palepu, and Ingrid Var-

gas, “Haier: Taking a Chinese Company Global,” Case N2-706-401 (Boston: Harvard Business School Publishing, 2005); and Tarun Khanna and Krishna G. Palepu, “Haier: Taking a Chinese Company Global, Teaching Note,” Note No. 707-459 (Boston: Harvard Business School Publishing, 2006).

51. Penetration figure from Graham Ormerod, G. K. Goh Research, “Guangdong Kelon: A White Good Comeback Play,” August 29, 2003, available from The Investext Group, http://www.investext.com.

| Notes52

52. Andrew Browne, “Haier Group Never Says ‘No,’” Reuters News, December 9, 1997.

53. Pamela Yatsko, “To Serve and Profit: A Chinese Fridge-Maker Wows Customers with Service,” Far Eastern Economic Review, October 17, 1996.

54. http://www.gome.com.hk/businessoverview.php. 55. Russell Flannery, “Watch Your Back: China’s Haier Got So Good at Selling Appli-

ances Abroad That It Underestimated the Threat at Home,” Forbes, April 23, 2007, 104. 56. This section has been adapted from Tarun Khanna and Krishna G. Palepu,

“Globalization and Convergence in Corporate Governance: Evidence from Infosys and the Indian Software Industry,” Journal of International Business Studies 35, no. 6 (Novem- ber 2004): 484–507.

57. This section has been adapted from Tarun Khanna and Krishna G. Palepu, “Why Focused Strategies May Be Wrong for Emerging Markets,” Harvard Business Review, July–August 1997, 41–51; Tarun Khanna and Krishna G. Palepu, “The Right Way to Restructure Conglomerates in Emerging Markets,” Harvard Business Review, July–August 1999, 125–134; and Tarun Khanna, “Local Institutions and Global Strategy,” Note 702- 475 (Boston: Harvard Business School Publishing, 2002).

58. Ramón Opulencia, quoted in Belen Villalonga and Raphael Amit, “Ayala Corpo- ration,” Case 9-207-041 (Boston: Harvard Business School Publishing, 2007), 6.

59. Villalonga and Amit, ibid. 60. Tarun Khanna, Krishna G. Palepu, and Ingrid Vargas, “Globe Telecom,” Case

9-704-505 (Boston: Harvard Business School Publishing, 2004). 61. John A. Quelch and Anna Harrington, “Samsung Electronics Co.: Global Mar-

keting Operations,” Case 9-504-051 (Boston: Harvard Business School Publishing, 2008).

62. Raymond J. Fisman and Tarun Khanna, “Facilitating Development: The Role of Business Groups,” World Development 32, no. 4 (April 2004): 609–628.

63. Tarun Khanna, Robert Pekannen, and Michael Yoshino, “Sime Darby Berhad (A)—1995,” Case 9-797-017 (Boston: Harvard Business School Publishing, 2001).

64. Ibid. 65. Tarun Khanna and Yishay Yafeh, “Business Groups in Emerging Markets:

Paragons or Parasites?” Journal of Economic Literature 45, no. 2 (June 2007): 331–372. 66. See Tarun Khanna, “At Home, It’s Not Just Profits That Matter: The Case for

National Ownership,” 8.

Notes | 53

5911BC_A05.pdf
5911BC_B05.pdf

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