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CaptureSeveral years ago, Tarun Khanna, SAI Director and Jorge Paulo Lemann Professor at the Harvard Business School, was exploring the streets of Jakarta, the hot and steamy capital of Indonesia. In need of an ice pack to keep some medication cool, he was baffled by the rounds he had to make for a seemingly simple request; he was bounced from hotel front desk staff, to a pharmacy, to an outpatient clinic with no front desk, to a beverage shop with no refrigerators.

At the end of the day he arrived at this question: “What are the costs of finding an ice pack, compared to finding the cost of the medication?” He came to the conclusion that if he put monetary value on his time and factored in what his time was worth in local wages, he would have spent 30-40 percent of the value of medication on simply procuring the ice pack.

In a Facebook chat for Harvard Business Review on Aug. 24, Khanna showed how this story illustrates the climate in an emerging market. One of the hallmarks of an emerging market, a home to 5 of the world’s 7 billion people, is the prevalence of transactional costs. As in his example from Indonesia, it is difficult for buyers and sellers to come together for a transaction because of missing institutions.

“An emerging market is one in which the potential buyer and potential seller have trouble coming together to consummate a transaction because the supporting structure of specialists and intermediaries that normally bring people together are absent because of institutional voids,” Khanna explained.

In order for a business to succeed, it needs what Khanna refers to as an “animating idea” that sets it apart. Furthermore, that organization then needs supporting institutions to help bring this idea to fruition: market research firms, accounting firms, logistics providers, business schools, engineering schools, and regulators. These are missing in emerging markets: the institutional voids.

For an entrepreneur, emerging markets can be both promising and perilous. The promise is somewhat paradoxical, according to Khanna. Because of the institutional voids, every missing institution is a potential entrepreneurial project, “dollar bills lying on the sidewalk,” if you will. A good entrepreneur will see this as an opportunity.

The peril, on the other hand, is that as an entrepreneur, you need to have a good understanding of not just your own business, but everything else in the ecosystem: “People who do not pay attention to the structural inadequacies of the environment, and the institutional voids, are likely to suffer failure,” Khanna explained.

To illustrate how an enterprise can be successful in an emerging market, Khanna discussed Narayana Health, a tertiary healthcare facility based in Bangalore and led by Dr. Devi Shetty. It aims to provide subsidized cardiac interventions, which cost almost one-tenth of the expense in other private hospitals in the developing world, and nearly one-fiftieth of that in countries like the US.

Shetty estimated that more than 90% of the people in the world who need cardiac surgery do not receive it due to financial limitations. Shetty recognized that he could take inspiration from enterprises such as Walmart to create scalable low-cost surgery through a standardized production process. He was able to make his surgery low-cost by taking the entire production process and breaking it down in to pieces so that every precise stage used correct protocols to ensure that costs were low yet results were high.

Because he was operating in an emerging market, Shetty also had to compensate for other inadequacies in the environment: medical education, telemedicine, logistics, transportation for patients, and marketing, to name a few. Khanna said this example shows that entrepreneurs either need to adapt to the institutional voids, or be entrepreneurial to fill these voids.

Khanna concluded his presentation by explaining certain mindsets that entrepreneurs should change. Entrepreneurs should recognize that innovation does not only happen in large organizations like in the past: “Innovation is being completely democratized,” Khanna said. “It’s happening in every nook and corner of emerging markets.”

In emerging markets, you need to have a mindset of extreme scale. Khanna pointed to the example of the Kumbh Mela, a religious festival in which 100 million people congregate on a riverbank in India. He said that in environments such as these, “chaos is a way of life,” and that successful entrepreneurs will view the lack of structure as an opportunity rather than a failing.

Click here to watch the full video.


-Meghan Smith