Emerging markets are the growth engine for most Western companies today. They also present a great opportunity for entrepreneurs in these countries to build the future. And from an intellectual perspective, emerging markets provide a lab for scholars because everything we know about management needs to be reexamined in a new context: Are ideas about management still robust when you change the institutional context? If not, how should we modify ideas about management in general?
Multinationals based in developed countries as well as emerging market -based companies face a tension between ambition and humility. Multinationals want to exploit the tremendous opportunities in emerging markets, but they need to carefully evaluate the extent to which they have the local knowledge and capacity to fully exploit those opportunities. Segmenting these markets and carefully aligning ambitions and capabilities can help multinationals avoid costly mistakes. Multinationals need the humility not only to gauge their own capabilities in relation to the institutional context of emerging markets but also in terms of their position in emerging markets. As one multinational executive explained, "Most emerging markets are highly sensitive. They're emerging because for years they've been colonized. That has left its own suspicions, distrust, et cetera of foreigners. It's certainly true in China. It's certainly true in India. It's probably true in many other places. So people want the benefits of globalization and development, but they want to know that they're not being exploited." 1
For Tarun Khanna and Krishna Palepu, both Professors at the Harvard Business School, an emerging market is anyplace where buyers and sellers cannot easily and efficiently do business with each other. The scholars therefore focus their research worldwide, not just on the BRICs.
Multinationals may stumble when they enter emerging markets while addressing a very limited group of people who can afford global quality at global price points.
The emerging middle class wants goods and services at global quality with local price points. It's a big challenge. If multinationals want to compete in emerging markets, they need to innovate to provide global quality, which is their forte using their resources and innovation capacity, but at a local price point. And often customers equate lower price points with lower quality. How can you actually produce global quality while charging price points at 50 percent lower than global prices? Only if you understand local customers and strip away unnecessary features of the product.
It is also a challenge for local companies because local companies usually reduce price by reducing quality. For local companies the challenge is to upgrade quality, while for global companies the challenge is to understand local customer needs and produce localized products.
A useful starting point for managers is to construct an institutional map and see what the institutional voids are. It's important to have the right kinds of conversations and identify the problems that need to be resolved over and above the core function in a business of making anything from widgets to washing machines to life-saving drugs. McDonald's sells burgers worldwide, but the way it does so has to change from location to location, adapting to the institutional voids in each location.