‘This is our moment in the Sun … and I am waiting for a revolution in education’

Or so says Tarun Khanna, the Jorge Paulo Lemann Professor at the Harvard Business School, where he has studied and worked with multinational and indigenous companies and investors in emerging markets worldwide. He has most recently co-authored Winning in Emerging Markets — A Road Map for Strategy and Execution. In this interview, he speaks to DNA. Excerpts:

One of the major things you talk about in your book is the institutional void in emerging markets. Can you elucidate?
The definition for us has got more to do with the rudimentary nature of mechanisms of bringing buyers and sellers together. In that sense, when you want to sell me something, and you and I cannot find each other, or can’t trust each other for a variety of reasons because the contracting regime isn’t robust or you worry about the courts and adjudication, then that market will not emerge. It will be non-existent.

Can you get into some detail?
It has more to do with structure of opportunities available at a given point of time and the mechanisms available to deal with those opportunities. For example, any time you have a big technological change you are likely to have a lot of institutional voids. Take the dotcom bubble — suddenly there were a variety of different ways of transacting that hadn’t been available before. But the mechanisms to bring transacting partners together virtually had not been formalised yet, so that was very much an emerging market.

Of course, political change would be another reason why things dramatically change, like when Korea decided to transition to an equity-based market. It is one thing to say that we want to have a robust equity market, for whatever set of reasons, but it’s quite another thing to develop the mechanisms to identify potential listers or to tell people who want to buy certain stocks what stocks are good and what stocks are bad. So the market takes a while to develop as these institutions emerge over time.

Can you give us an example?
A good example is a company called Aspiring Minds, with which I have been working very closely of late. It’s the ultimate institutional void in India. The idea being that, we have 300-400 million people, depending on how you count, who are locked out of urban India or out of the mainstream economy.

But, nonetheless, there is a lot of talent there. There is a big void between companies that demand talent, which are often complaining about attrition and scarcity and so on, and all these people who would like to get a job and are often qualified to get one, but there is no mechanism to break down the institutional barriers between them.

And Aspiring Minds is trying to fill that gap?
Yes. There are two entrepreneurs — one from Massachusetts Institute of Technology and one from the Indian Institute of Technology, who have created this assessment mechanism which is state-of-the art and world-class. The idea is to very cost-effectively, almost seamlessly, test almost hundreds of thousands, perhaps millions of people, in different locations around the country and make those available to corporations.

So when you go around to our biggest corporations and say where are you sourcing talent from? Even the most ambitious of them will say from fifty, sixty or hundred colleges. You can tell them why not twenty thousand colleges? Here is a cost-effective way to do it.

A theme running through your book is that when multinationals enter emerging markets, they have to at times develop their own infrastructure as they go along.  Can you give us some examples of this?
Most large global multinationals would have encountered this at virtually all times when expanding into particular countries. One is a company that is trying to create a foothold in India — Metro Cash & Carry — which happens to be a German wholesaler. What they do, among other things, is offer rural-to-urban connectivity of produce and goods and services of different sorts. So they make large amounts of material available to urban consumers often sourcing it in different places.

Take the simple example of sea food or fish of some sort. For sea food to be made available to large numbers of people in good condition and in a hygienic way there has to be a cold chain and that cold chain often does not exist. In many countries there are established entrepreneurs who deal with cold chain services. And they provide the cold chain. Metro has had to create the cold chain. It is not that cold chain providers don’t exist in India but it is just that sector isn’t vibrant enough to meet the needs of specialised users that particular service

Any other example?
McDonald’s is a company which has had to do it over and over again. The particular instance that is quite striking for McDonald’s is in Russia where they literally discovered that a lot of support mechanisms they needed to run their business in the West were missing. What was worse that many of their conventional suppliers refused to come to Russia in those days, which is a couple of decades a go, because they did not find the opportunity attractive enough.

So McDonalds had to set up a horticultural institute, a transportation system, an educational institute, a cleaning service, and a quality adjudicating service. All the things that it took for granted for in the West, in order to cater to its business which is ultimately selling clean fast food. And over time, as institutional infrastructures emerged in Russia, they have been able to spin off these businesses and are left with a narrow footprint business that does much less than it had to do in the past.

One of the mistakes that companies seem to make while getting into emerging markets is to enter with the exact same business model that worked back home. Can you give us an example?
Wal-Mart is very successful in Mexico these days. But it went through a very lengthy learning process. And a part of that process was getting the merchandise entirely wrong and learning about that over time. Even some of the most celebrated success stories — look at GE in India — they went through a long period prior to becoming successful, trying to sell goods and services that are arguably built more for the developed west than India.

At some point they more or less abandoned the effort and decided that they were going to use India more as a talent and a source of back-office operations. Eventually that led to Genpact being formed and spun off from GE and then they returned to the idea they are going to sell things that are more suited to the Indian environment. So in that brief description of a long chronology, what you see implicit are several mistakes, reinventions and experiments.

And I think that is very natural for almost every company that I know to go through a series of experiments to identify what is it about the business model that is likely to work.

How should a company decide what is the right business model when entering a new country?
It is a series of iterations. One reason that we wrote the book is because we feel it is possible to iterate more efficiently as opposed to iterate ad nauseam and inefficiently. And so our claim, our thesis, our hope is that people will start with a map such as the maps in the book and say let’s use this as a starting point to layout some of the issues in the country and to use that as a template through which you can design experiments to determine what parts of your existing business model can be replicated and which can’t. Hopefully that would make the iteration process a bit more efficient.

You talked about Metro Cash & Carry. They have had hiccups…
If you look at the original Bangalore store, I believe it is built to specs that are very close to the stores in Germany. And what I think Metro’s new CEO will tell you is that it is not necessary to have store built to German specs in a very different socio-economic milieu, in a very different setting, where people interact with customers differently, very different climatic settings, a very different need for temperature control and humidity.

So a lot of things vary. And so a part of is getting the physical form of the dispending mechanism right. Part of it is recognising that there are multiple ways to be a wholesaler in different situations because you are ultimately a wholesaler. And they still remain a wholesaler and they remain true to the admonition that they don’t do any retail around the world and they don’t do any retail in India.

And they remain true to the idea that there brand Metro Cash & Carry should be presented in a particular way and there are three or four other things that are not allowed to change. But other than that there is a lot of experimenting is going on in the Metro business model in India, as well as the Metro business model in China and in Turkey, in Prague and all sorts of other places.

One of the interesting examples in your book is about the success of GM in China. What explains that and their rather slow expansion in India?
A variety of things. China entered the consciousness of the developed world much sooner than did India, arguably ten to fifteen years before that. So you have a number of western companies that initiated operations in China before they did in India.

There was a sense in which those efforts that have been successful led to the institutionalisation of ways of doing things, within the companies. And that made it even more easy for those companies to do business in China and ignore other places like India. Motorola would be another good example.

Motorola, for a variety of historical reasons, went to China first  and did very well, so there was seamless connectivity between the China headquarters and the headquarters of Motorola at Schaumburg in Illinois, United States. Motorola never really came to India in the beginning and therefore any operation that was going on in India had to be done through Singapore, or through some other place and it then went to Schaumburg.

And that made it difficult?
Yes. You can imagine the local Indian country manager trying to get resources. In the case of the Chinese, it was just (the matter of) a phone call.  There are companies that have gone the other way. Unilever is very strong in India but historically hasn’t been strong in China and am sure there are others. Often reasons are not particularly scientific and they are just idiosyncratic.

In China’s case, just the idea that they opened up much earlier than India has played a big role in many companies, getting there and settling and then cementing on that strength over time.

From your book one can gather that Microsoft made a few big mistakes when it entered the Chinese market. What were those and how did it correct?
I think in the early years they made a lot of mistakes. And I think it is a prototypical case study of a series of very classic mistakes. One is the presumption that the mechanism through which they had managed to get packaged software standardised in the West could be replicated in China.

And the presumption that the Chinese will see that what we did with the standardisation of the software industry was so good for the industry and that the Chinese want a software industry and therefore they will let us do it. What they did not realise at that time, though it was reasonably clear  — that there was an indigenous software industry that would not want to see its own bread and butter being taken away from it and so understandably would resist and more than that, the local industry understood the power structure much better.

I think at some point, particularly under Craig Mundie, who is the No. 2 or 3 guy in Microsoft — and he is jokingly referred to as the secretary of state within Microsoft — with reference to the term that is used for the American foreign minister….

So what was the lesson learnt?
They realised that you almost needed a secretary of state to deal with many countries, that you need to be plugged in not just into the technical aspects of the industry structure but you need to understand the political and social environment as well. Somebody with Mundie’s stature is fulfilling that role. Microsoft did not set itself up as a partner in progress in those days. It set itself as ‘we are the software vendors of choice, you should use us as it is good for us, it’s good for you.’

Is Google making the same mistakes now in China?
No, Google has a different set of challenges but it’s not making those mistakes. For instance, Google had been pretty aggressive in tapping into high-end technical Chinese talent, which Microsoft was not doing in the early days, though now they have corrected that mistake. The Beijing R&D centre of Microsoft is state-of-the-art and is fantastic.

I think it is the best in the world among Microsoft’s centres anywhere, at least in some technical areas. And Google is doing the right thing by tapping into high-end technical talent even in China, of course it’s got a different set of issues—the privacy issues, the emails, the security issues - something that Microsoft didn’t have. Whether Google will be able to surmount those challenges, I don’t know.

You are on the board of SKS Microfinance. How do you see that company doing in the days to come?
The thing that really makes me happy about SKS Microfinance is the women whose children are going to the school
because they have good few extra rupees and we know from decades of social science, not just in India but also across the world that once children go to school, the families in the next generation would be better.

How do you actually rate entrepreneurship in India vis-a-vis the Western world and the emerging markets?
Right now it’s hard to find a place that is more exciting than India. You know, this is our moment in the Sun.

Which are the companies in India that you really find exciting? 
Companies that I find really interesting in India are companies like SKS, or start-ups like Aspiring Minds or companies like Bharti Airtel that has taken communication to the masses. Or even my good friend, the heart surgeon in Bangalore, Devi Shetty (of Narayana Hrudayalaya fame) who has taken cardiac surgery to the masses. 

I think the common denominator among these is finding economically viable, sustainable ways to take things that we normally associate, whether it is cars, financial products, heart surgery or fancy phones, to anybody and make them readily really available across the spectrum and affect change and enable livelihood. What I am waiting for is a revolution in education.