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Prof. Tarun Khanna of HBS Discusses Strategies for Winning in Emerging Markets

Prof. Tarun Khanna, Harvard Business School
Professor Tarun Khanna of Harvard Business School is an expert on business strategies for emerging markets. He speaks to DaulatGuru.com and discusses how his new book can help entrepreneurs from emerging markets like India.
Winning in Emerging Markets: A Roadmap for Strategy and Execution




 





Tarun Khanna is 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 joined the faculty in 1993, after obtaining an engineering degree from Princeton University (1988) and a Ph.D. from Harvard (1993), and an interim stint on Wall Street. During this time, he has served as the head of several courses on strategy, corporate governance, and international business targeted to MBA students and senior executives at Harvard. He currently teaches in Harvard’s executive education programs and is Faculty Chair for HBS activities in India.

His book, "Billions of Entrepreneurs: How China and India are Reshaping Their Futures and Yours", was published in February 2008 and has been translated into several languages. It focuses on the drivers of entrepreneurship in China and India and builds on over a decade of work with companies, investors and non-profits in developing countries worldwide.

During this interview we focus on his latest book titled: "Winning in Emerging Markets: A Roadmap for Strategy and Execution".


Billions of entrepreneurs: how China and India are reshaping their  futures In your book "Billions of Entrepreneurs: How China and India are Reshaping Their Futures and Yours" you have discussed about Infosys. India has successfully produced companies that provide IT services. However we do not find a Microsoft, Google or Facebook from India. What do you think is holding back the creation of innovative companies in India?
 

 

 

 

 

 

 

 

I think that’s a very good question. I guess I have a two part answer to that. The first part is that all the major Indian IT companies, at least the leading  4-5 companies, have done very innovative things on a dimension that is quiet different from Microsoft’s,the latter focuses on package software, or Google which is essentially an algorithm; the Indians have been  creative on the process side. And that makes a lot of sense when you think about it because the added value of these companies is in developing processes that can leverage massive amount of skilled manpower. So, when you think about what are the logical things that one would expect to come out of India as opposed to somewhere else, it should be something that leverages the institutional context in India as opposed to something that is much more generic. It is not surprising in some ways that the innovation that comes out from a populous place leverages the fact that it is a populous place.

Second part of my answer to the lack of even further success is that we need an education system in India that values diverse type of training. What we have now in our engineering colleges so far is excellence on one or two dimensions, raw analytics and so on. We have much less focus on a broad spectrum learning. I feel that creativity is all about mixing and matching insights from different parts of life and making them real.

I don’t want to say that everybody should do Humanities or everybody should do Languages but somehow the mix of people who are involved in developing products and services should be more diverse set of people. Right now we have a very narrow technical view of the world. It’s a good starting point but not the best way to foster creativity.

The last part of the answer is that you know it takes time. Whether you look at Toyota working its way up to become a leading car company or a recent example like Teva, which is an Israeli pharmaceutical company, that has become the world’s largest generic manufacturer. The transition took 30-40 years and it’s not an overnight thing. I would expect over time you would see more creativity in either existing companies or in new companies that will be starting up.



What are the major highlights of your new book "Winning in Emerging Markets"?

(The official website is: http://www.winninginemergingmarkets.com )


My coauthor and I  basically  take the term “Emerging Market” very seriously. That’s the main issue. I mean rather than defining “Emerging Markets” in terms of outcomes – that is, most definitions of emerging market tend to say that they are poor, unstable and corrupt, etcetera, all  outcomes – in contrast, what we have done in this book is to create a conceptual map of an emerging market. We want to say that when you find yourself in this situation, these are the points you should look for. Here are 10 different kinds of structural weaknesses that make the market an “emerging market”.


In other words, a “market” is nothing more than something that matches buyers and sellers. In our terminology, emerging markets are situations that exist when buyers and sellers have trouble coming together for whatever set of reasons. So the market is still, literally, emerging, though it might well be emerging in different ways in different locations.  When an entrepreneur starts building a business plan or an investor is looking for opportunities and will say, “We don’t see things happening in Brazil but we see different kind of things happening in South Africa and not in India. Why is that?”


Then if you go back to the map, the reason why country ‘A’ is emerging in one way and country ‘B’ is emerging in a different way can be traced back sometimes to historical factors. In some cases the risk capital might be much more absent and in other cases the business schools might not have developed sufficiently. In certain cases the system to adjudicate consumer disputes may not be well developed and politically compromised. Our contribution is to provide a conceptual map of what we refer to as institutional voids.  The map will tell you what is doable and what not to do. That should be your central part when making a business plan and deciding when and how to invest. So it’s meant to provide an actionable way to engage with emerging markets



What do you think is the most important historic factor influencing the way India is emerging?


One example of how history matters is the creation of the IITs. It goes back to Pandit Nehru’s wish to create world class science and technology institutions. It’s an historical factor and nobody would have dreamt that the IITs will contribute to creating TCS, Infosys and so on. In fact, these companies have ridden on the wave of the early investments made in the 50s and 60s.

The other example on a less positive note is the history of our social structure related to the caste system. The politicians have manipulated them to make it even stronger by encouraging so-called vote bank politics. Unfortunately, that has created all sorts of rigidities made it very difficult for free markets to operate in a way that allows poorer people to enter mainstream world economy. This is a factor that goes back centuries and not just decades.



Many entrepreneurs in India do not get access to seed capital. This is the capital they need much before they can approach VCs. What can be changed in India so that entrepreneurs can get access to initial funding?


I think you have put your finger on the main issue. In India, risk capital is very, very scarce. It’s not just an India specific scarcity but in most developing countries. Even in many developed countries risk capital is very scarce for new entrepreneurs. The existing businesses can always use their cash flows from existing operations to start new businesses. That’s why you see increasing dominance of a few business families over time. This is not only in India but also in most emerging markets.

I think there is no single silver bullet solution. We need to highlight these problems and set right policies to encourage risk capital. Business-people  can make a start by forming so called Angel Networks over time. We have seen this started in places like Mumbai and Delhi though they are still nascent. 



Late Prof. C. K. Prahlad spoke about the opportunities at the bottom of the pyramid. Are Indian entrepreneurs properly exploiting this opportunity?



They are starting but we need more “economic inclusion”. It will be nice to bring the 500 million people in our country into the mainstream economy. I don’t think socially conscious businesses can afford to wait for government to do this. I think it’s our responsibility to somehow create business models that include the people at the bottom of the pyramid. Many companies like Unilever, ITC, Hero Honda have taken some initiatives to go into the hinterland and also new firm like SKS Microfinance are doing a good job. There is a whole range of efforts that Indian entrepreneurs are launching.

This is complement and not a substitute for much-urgently-required public policy. Just to show that even an individual can make a difference, consider a company called Aspiring Minds (www.aspiringminds.in) which I have helped recently. It’s started by 2 brothers in Delhi, one from IIT, and one from MIT, and is effectively a technology-based employment exchange of sorts, taking the technological task of assessment very seriously. In the first year this company has already delivered thousands of jobs to otherwise economically disenfranchised youth from  smaller cities. I think that in this scheme of economic inclusion it is very important to pursue many such ventures.



Many Indian students who study in US are not sure where they will see more career growth. Do you think there will be more opportunities in US or in India in the coming decades?


I think it’s a hard choice. Many students pose this question to me weekly. A general answer is very hard. On the one hand, the enviorment replete with institutional voids, is ripe for new businesses.  On the other hand, if you are from India and you need to see the world, then I would encourage you to capitalize on that intuition, there is indeed much to learn from experiences all over.   India has a lot of growing left to do.  The window of opportunity may close for some time, but it’ll reopen if there is a temporary reversal, I’m confident.



India and China have followed different growth strategies. How important is the role of FDI for the long term growth?



I think FDI is very important in all countries. It is not just important to bring money but also to plug-in the countries into the world system. What we know is that the best way to grow is by mixing and mashing of ideas. And FDI is primarily important because it facilitates the mixing of ideas. The ideas about management, corporate structures, technology etc can be shared. And unless the countries are plugged into the world’s system, they will not be benefited.  China has plugged into the global system magnificently.   India has focused much more on indigenous enterprise, as I argued in "Billions of Entrepreneurs", my previous book (Harvard Business Press and Penguin 2008).  My intuition is that the balance of FDI and cultivating indigenous enterprise is better than exclusive reliance on one or the other.



Which sector do you think will see a huge growth in India in the next 5 years - software, healthcare, cleantech etc?


My feeling is that anything that leverages the idea of economic inclusion that brings people into the mainstream. That’s where the mass market is. So, think about what goods and services the masses need. I don’t think it’s exactly equivalent to the bottom of the pyramid because I am talking about 500 million people. It’s too big to be purely at the bottom of the pyramid. There are so many things that the top 30-40 Indian cities need. Whether it is education, healthcare, electric power or clean water – there are huge opportunities.  Public policy of course is important, but entrepreneurs must look for opportunities even prior to policies emerging fully; in fact, they must help to shape policy prudently.


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