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Q&A: Tarun Khanna, Professor, Harvard Business School

'Companies should keep on asking themselves what they are good at'

Sayantani Kar  |  Mumbai 

Companies expanding their footprint in other countries must first ask themselves why they are successful in their original businesses, says Professor and Harvard University South Asia Initiative Director Tarun Khanna. When not spearheading courses on strategy, corporate governance and international business for students and senior executives at Harvard, he serves on the boards of global companies from different sectors. Khanna also mentors startups in Asia. In conversation with Sayantani Kar, Khanna says few companies introspect on their core strengths before seeking growth in new markets. Khanna’s experience with companies and investors in emerging markets worldwide has seeded his two books, Billions of Entrepreneurs: How China and India are Reshaping Their Futures and Yours (2008) and Winning in Emerging Markets: A Roadmap for Strategy and Execution (co-authored in 2010). His new role as Director for Harvard University’s South Asian Initiative will see him tapping Harvard’s resources to make stakeholders in emerging markets aware about the challenges before them and how to deal with them.

In your blog you’ve said “It’s not too late for Western business leaders to shine a light on these ideas emanating from the world’s newfound economic petri-dishes”, when referring to emerging markets. Can you elaborate?
The starting point is: ‘What do you really mean by emerging markets?’ The way I think about it is they are situations where for various reasons it is difficult for buyers and sellers to come together. What may be missing could be different from place to place. In some cases it is hard to find good employees because search firms are not there. In other places it could be debt capital because the corporate bond market is missing.

When you are building a business or organisation, you will have to adapt. In a place where labour is hard to come by, you have to bend over backwards to be innovative to retain talent, adapt to the limitations of the environment. In this case, it could be investing more in in-house training and culture to get people to stick around. In markets without financing, you may be forced into businesses which need it less.

Emerging markets as a class have far more severe limitations. Rather than thinking of these as purely a handicap, the good news is that people living in emerging markets are turning these into necessities that lead to invention. That invention would have resonance in other parts of the world too. One such area that I am very involved right now with is low-cost healthcare. Where I live, the US, 50 million people have no healthcare, and that in a rich country. So, low-cost healthcare is something that will be embraced immediately, by the insurance companies and governments. Device companies such as GE, then Johnson & Johnson, hospitals like are doing it in India. Hospitals in Boston are studying So, developed markets are asking ‘what can I learn from this?’

You say it is difficult to pick a model emerging market. Why?
If you take the historical view, countries have different ways of developing. They could be accidental, geo-political or by choice. So, the institutions that are underdeveloped in these countries are different from each other. At a generic level, all of them are missing some institution. In India, the physical infrastructure is a problem, in China the softer one, such as accessing information, poses a challenge.

How can companies get around these “challenges” as you put it?

It doesn’t only have to be multinationals who have to fill such voids. The Tatas are an example. When took over in mid-nineties, one of the first things they did was to invest in the Tata brand name. Historically, a lot of companies in the group had the Tata brand name but had not invested in it. So, they put in place a mechanism to police the brand. If you were using it inappropriately, then there would be some sanctions. The reason they were doing that was it was a surrogate for quality and trustworthiness. In the US, I would not be worried if a no-name product came out. I know that if there was a fraud, I could go to authorities, regulators, lawyers and take the company to task. Not so here, because there is no telling how much time it would take. Some companies have wonderful rural distribution — they had invested in them when there was a lack of infrastructure.

I always like to give the example of two brothers I have worked with, one from and the other from MIT, who started a company called Aspiring Minds. It is a perfect example of filling an institutional void. There are hundreds of millions of people graduating outside the top educational institutes who need a job and skill. They don’t have access to a brand name. Corporates are always complaining about talent. The brothers said, ‘We are going to create a technological bridge to allow these people to be located and tested and bring them into the talent pool for corporates in a very cost-efficient way’. They have already got white collar jobs for at least 10,000 people from small towns in a short period of time. Corporates are basically content to go to the top 10 institutes and fight over the same people. What about the other 30,000 colleges? It might cost more for the corporates to go to the lower rung colleges but it makes sense if companies like Aspiring Minds bring the talent from these places at a low cost.

Have the priorities for multinationals changed over the last few years - post the downturn and now the rebound - for those looking to enter India? Starbucks is entering India, GlaxoSmithKline is toying with the idea of bringing more from its global basket of oral care products to India.
The priorities haven’t changed. It has become more urgent. With the slowing down in the developed world, they have to be more expedient in entering markets of growth. There’s been a first step of recognition. Companies are now not sceptical of the fact that a lot of growth will come from the developing world. They are rushing to embrace that idea but I am not sure they have quite internalised what to do with that idea. There is still a knowledge and awareness gap of what it takes to operate in emerging markets. A handful of companies have done it well for some time and we hear about them but a vast majority is still not so familiar.

So how do “familiarise” themselves with emerging markets?
One thing that I think is useful is to get a group of people who would be a mix of people within the company and locals who may or may not be company employees. They could be potential observers, distributors, customers or part of the diaspora who originated from that country. There should be such a task-force created to educate the rank and file about how to work there. Mix the insiders with the outsiders. Take gyaan from outsiders and adopt it. Look at the handset manufacturers in China, for example. I would say that there was a phase when the multinationals dominated a decade ago. In Brazil, local companies are also doing well. One of the attractions of these places are there is a lot of competitive ferment making it an ecosystem to create new models.

What about Indian companies looking to expand — going to other emerging markets and even developed markets. Which should be the markets they should concentrate on first?
The particular expansion path will vary depending on the company and the industry. Our book articulates different expansion paths. One of them talks of when a model is predicated capitalising the differences between countries, say, low talent costs. Then you want to be in countries very different from you. But when the model hinges on a product made for emerging markets, then they will enter other emerging markets. Companies are beginning to think that there is a world outside India and starting to ask the question, ‘Where do I get the most bang out of my buck’.

Do Indian companies need to focus on acquisitions or organic growth?
Every company has to decide what it is going to learn to be good at. One dimension of learning to be good at something is deciding how to grow. Whether organically, or be a specialist in managing joint ventures or acquire companies. An Israeli company, Teva, the world’s biggest manufacturer of generic pharmaceuticals, has beaten all the Indian companies handsomely. One of the things it has learnt to do is swallow other companies, it is like a machine. For the last 20 years, it has been systematically buying up, first smaller companies, then bigger ones and now giant billion dollar companies in one shot. It takes time. Korean companies, on the other hand, never learnt to do mergers and acquisitions (M&As). May be they feel that it is too different. Chinese companies have had a difficult time swallowing Western companies. They have learnt to manage risks of organic investments. There is no rule that says that M&As are better than organic growth. The trick is finding out which one the company will be good at.

Are cultural issues a big hindrance in the way of expansion for companies from China and Korea? Do Indian companies find the going easier in that respect?
They would say that ‘culturally we are distinct’. But I find that indefensible. I just think that circumstances have not risen where they have learnt to master M&As. The Koreans and Chinese are extremely capable and competent. Look at the size of the companies they have created. I have no trouble with cultural explanations but I don’t believe the idea that they can’t buy companies because of that can be used as a stop-gap to explain everything.

In recent years many Indian companies with a global footprint have gone in for massive rebranding exercises to integrate the audience, including their employees from other countries. How critical is a large-scale rebranding? What are the key things corporations need to keep in mind to ensure it doesn’t backfire?
Rebranding is not critical. It is the flipside of an MNC coming to India. The Indian companies need to mix and match talents from those countries so they can be as acquainted with the new markets. Rebranding will depend on what their brand is currently. Rebranding is a costly exercise; so you do it only if you feel the need to do it.

You have said earlier that companies that are looking to expand need to decide what core to not change and what to localise…
When a company is successful in its original conception - its business and geographic origin — it has to take stock of why it is successful. It is often difficult because everything is business as usual — they are doing hundred different things to get the product out of the door, to sell it and service it. The reason is that when expanding in a new geography or business, the new context will put a different pressure on the business. The model will have to change and rapidly it will become complicated. So, early on, there needs to be experimentation and dialogue to figure out what are the things that needs to be changed.

Can you give us examples of companies that have done it well?
Consider the example of Dell going into China. Dell in the US would have told you that it was successful for many reasons. Customisation would be one of them, supply chain efficiency - deliver the product at the consumer’s doorstep with zero inventory-holding — the other. When it went to China, it discovered that it couldn’t have unlimited customisation and immediate delivery. Because the supply chain was totally broken, people didn’t want to order on the web, they were not comfortable paying online, they wanted to fax the order in, wanted to go and touch the computer. Dell had to decide what they were about — is it unlimited customisation or supply chain efficiency? They chose supply chain efficiency and offered limited customisation. Over time, they have learnt to offer more.

Companies should keep on asking themselves what they are good at. At workshops, everybody has immediate answers but if you prod them on the reason, they say ‘It’s been always like that’. I have to probe them further about when was the last time they had looked at it, and if they know which one will be more important. The route to more margins will have to be determined.