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Let’s consider the success-replication story so many of us are trying to script today. Extending the success of a company, that’s doing well in the developed world, to the emerging world. Economic growth, in the developing world, is 4 times that of developed nations. It accounts for approximately 40% of the world GDP. It consumes over half of the world’s common commodities. Add to this research that points to untapped demand, unfulfilled aspirations and large white spaces in the competitive landscape. The business case is compelling.

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Replicating SuccessIs there a formula?

- Anand Arkalgud

2 | Infosys

So, why do so many developed market successes end up as emerging market strugglers?Possibly, a misguided approach is to blame. Many companies incorrectly assume that they can replicate their developed world success, in emerging economies, by starting off simply building on their developed world mental model of the business. Of course, they finally get their arms around what aspects to change and what not to, in the new market, but it takes an inordinately long time with several rounds of trial and error. The gaps lies in, what is best explained as the “institutional void” propounded by Harvard Business School Professors Tarun Khanna and Krishna Palepu.

Khanna and Palepu argue that institutional voids may be found in capital, product and labor markets; each type giving rise to a different kind of business complexity. For instance, in countries without a strong capital market and governance structure, even the largest businesses need not make their financial statements public. How can a foreign entrant possibly conduct a competitor analysis without this information? Similarly, if this company chooses to go to a country where the education system is not industry-ready, it has little chance of quickly finding the right kind of talent that can be readily harnessed to drive business. And so on…

Institutional voids are often the reason why a US$ 10 billion corporation from the United States cannot build a similar business in China, using the same mental (extrinsic & intrinsic) model for success. No doubt, some elements of the original model still apply to the emerging market context - such as expertise in managing the complexities of business - but there are simply too many differences on the ground, questioning the advisability of a one-to-one replication.

Let’s look at these differencesImagine that a hypothetical successful American corporation is planning to enter an emerging market. During its 50 years of existence, the company has, no doubt, developed explicit capabilities within its organization in the areas of finance, human resource management, manufacturing, product design and development, and so on. In all likelihood, it has also nurtured explicit relationships with partners, suppliers, customers and other members of the ecosystem, all of which enable it to create and deliver products, collect payments, arrange financing, and succeed in its endeavors. But it may not have given the same attention to all those implicit relationships – with regulators, lawmakers, analysts, rating agencies, professional associations and media, to name a few - that it relies on or takes for granted, which may be less visible but nevertheless critical to its success.

That inattention could change very quickly should the company find that some of these institutions are absent in its target market. For instance, if the destination is China, the corporation, accustomed to screening customers in the United States based on the credit scores provided by ratings agencies, will find that it is tougher to get similar information out there. Or the enterprise may discover, at a significant cost, that the judicial system in India could take years to decide a case, which back home may be mandated by law to be resolved within 30 days!

And it’s not just entities from advanced markets that face this problem. Take the example of Infosys, India’s technology solutions bellwether, which enhanced its brand in the U.S. on the strength of its execution excellence. When the company researched U.S. customers’ rating of suppliers, it found a big gap between the customers’ expectations from execution and what was actually delivered. Infosys used this knowledge - and its own strength in

execution - to differentiate itself. Customers reacted positively to this information, but it was the analysts who really gave Infosys its wings in the U.S., by talking about the company in their reports. Could this have happened, in a place like China, where very few consulting companies are listed and fewer analysts found? The answer is obvious.

Clearly, there’s a case for companies to employ a framework to analyze their own success, its many drivers - including the tacit ones, and then the emerging market they seek to enter to clearly understand the possible gaps in the jigsaw puzzle. They can then work to close the void before setting out to recreate success.

From various commentaries, as well as personal observation, it seems to me that not many organizations invest adequately in making this analysis; perhaps some haven’t thought of it, and others may have simply lacked the resources to undertake the exercise. But a more likely reasoning is that over time, companies intuitively integrate with the ecosystem of institutions and infrastructure in their home markets, and this is so engrained in their mental model (and their business model!) that it becomes hard to change.

But what I would urge enterprises to see is the huge upside for those willing to make the effort. Because, while an institutional void can pose a challenge, it can also spark breakthrough innovation. And give a substantial first mover advantage.

The prepaid mobile business in India, China and several countries of Africa is a case in point. Telecom companies couldn’t possibly apply, to these countries, the postpaid model - which was so successful in the U.S. where it is easy to ascertain a customer’s creditworthiness as well as collect dues. So they negated this constraint by coming up with a prepaid model. And despite the subsequent proliferation of network operators, those who got into the market first gained the most.

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Here’s another example. Consider Infosys’ acclaimed educational campus. It has cost the company the equivalent of a space shuttle launch to build its training center. But this was a response to a shortage of adequately trained, motivationally aligned, business-ready human resource in India. Today, spurred by the huge competitive advantage this creates for Infosys, it is a clear model that others are seeking to emulate. Companies that move first to close an institutional void through meaningful innovation create breakthrough advantage for themselves, and erect barriers that their rivals take years, if ever, to overcome.

This leads to some interesting hypotheses. Developed world organizations need scale to succeed in emerging markets. Unlike the markets of Europe and the U.S., where companies, big and small, have a similar chance of succeeding, thanks to the affordable cost of doing business, fewer voids and an institutional framework which protects the interests of small firms, in emerging markets, the scales are heavily tipped in favor of size. And it is size which makes it possible for conglomerates, such as the Reliance Group in India to afford the cost of addressing an institutional void, and subsequently cross-leveraging the initiative across their entire organization.

The second one is that it is not always necessary to take the challenge head-on; sometimes it may be possible to work around the void. Consider the distrust of baby food that prevails among Chinese parents. A credible mechanism to certify the safety of these products is the logical solution. However, in its absence, parents have resorted to a workaround solution: those who can, ask their friends to bring these products from abroad, and those who cannot,

are constantly watching what others are buying and following suit. Now, what if an enterprise found a creative way to address this issue, by empowering the consumer, rather than relying on governing institutions for the solution?

But, this isn’t only about emerging markets.While the institutional void concept and surrounding framework has been developed in the context of emerging economies, it can be extended beyond. In the context of a specific success replication challenge, the void might not necessarily be the absence of an institution, but rather a certain type of behavior or manner of product usage that is typical to that new market or segment, and therefore neither known nor anticipated by the organization seeking to replicate success. But that must be addressed nonetheless. And this void brought to the organization’s notice.

Enterprises must invest time to look through a comprehensive lens to systematically spot the hidden or nuanced characteristics of a business environment that may not be visible at first glance and then guide the process to identify innovative ways to adapt. In any market. Any segment. And that is an advantage few enterprises will want to ignore.

About the Author

Anand Arkalgud Vice President & Building Tomorrow’s Enterprise (BTE) Expert, Infosys Limited

Anand’s professional journey started in India just under two decades ago, and then traversed Australia, the United States and China, where he has lived and worked in a career spanning different industry segments, and service lines.

Anand now leads a group of Infosys experts who endeavor to partner with key clients to future proof their enterprise. He is also passionate about and leads efforts to identify opportunities and challenges for companies in emerging markets.

Until early 2011, Anand was responsible for establishing and growing Infosys business in the Greater China region. He has played a key role in Infosys’ emergence as one of the fastest growing multinational business and IT consulting company in China. Before moving to China, Anand was a senior member of the Hi-tech and Manufacturing practice with Infosys in the US.

Anand holds a degree in Instrumentation technology from the University of Mysore, and an MBA from the University of Queensland, Australia.

© 2012 Infosys Limited, Bangalore, India. Infosys believes the information in this publication is accurate as of its publication date; such information is subject to change without notice. Infosys acknowledges the proprietary rights of the trademarks and product names of other companies mentioned in this document.

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