In developed countries, the best friends of businesses are the legal, political, and social institutions—banks, courts, intellectual property safeguards—that provide a protective and predictable environment for companies to compete. The reality is much different in developing economies, where the rule of law might be poorly enforced, social anarchy flourishes, or the military runs the government.
So, it is quite remarkable when entrepreneurs in developing economies not only prosper, but also sustain businesses over the long run: companies such as Tata Group, founded in India in 1868, or Mexican bakery Grupo Bimbo, started in 1945.
What sets these firms apart? What can leaders in developed markets learn from them? In the recent working paper Overcoming Institutional Voids: A Reputation-Based View of Long Run Survival, the authors find that an organization’s reputation is a crucial factor for long-term success. Less well understood is the key role played by resilience—an organization’s ability to overcome unexpected shocks.
The researchers—Cheng Gao, a doctoral student at Harvard Business School; Tiona Zuzul, assistant professor at London Business School; and HBS Professors Geoffrey Jones and Tarun Khanna—came to their conclusions after reviewing the transcripts of interviews with 69 business and NGO leaders from a variety of developing markets around the world, part of the Creating Emerging Markets series at HBS.
We asked Jones and Khanna to discuss the importance of reputation and resilience in building long-term business success.
Sean Silverthorne: How do you define “reputation” in the context of the paper?
Tarun Khanna: In emerging markets, it’s a combination of three things: notions of prominence, perceived quality, and resilience. The first two elements, prominence and perceived quality, you can find as being important in developed as well as emerging economies. The reason we think resilience is important to think about in a developing economy context is that they are characterized quite often by turbulent situations. When you are negotiating in a turbulent environment, you feel reassured if the entity you are transacting with is likely to be around tomorrow. Otherwise, what’s the point of investing time and energy and money with them?
The entrepreneurs in question from Latin America, Africa, Turkey, and South Asia exuded this idea of stability, which assured employees, partners, customers, and everyone else.
“After the crisis of 2009, the orders increased and our growth rate over the following five years is 21 percent per year. Why? Because we have the trust of our clients who saw how we managed to overcome the crisis.”
—Antonio Madero, Founder, Chairman and CEO of Sanluis Corporation (a leading Mexico-based automotive parts maker)
Silverthorne: Was this focus on reputation development pushed by leaders? Did they personally drive it through their organizations?
Khanna: Leaders interviewed for the Emerging Markets project are generally considered to be iconic stewards of their society. They may be great business people, they may be prominent regulators, they may be people who built important nonprofits or contributed to civil society in some sense; but almost all have been involved in developing the reputation of their organizations, or enhancing it during their professional lifetimes.
To what extent is the reputation traceable just to them? That is hard to disentangle from the laundry list of items that might affect a reputation’s creation, maintenance, or dismantling. What you do find is that many leaders expressed, in their interviews, coming to the realization that reputation was extremely important, and, having arrived at that, then going the extra mile to make sure they developed it as an asset for the organization, their business, and so on.
One of the most interesting things to me was how many leaders admitted that the reputation either was accidentally developed by them or bequeathed to them by circumstance. It’s like the expression, “Luck is where opportunity meets preparation.” They were prepared to capitalize on sometimes quite negative events, take the high road, do the right thing, and develop a reputation as a result.
They almost always found that building reputation created returns, as in talented people appreciating the creation of the reputation and flocking to them, and customers appreciating that they stood for something vital and resilient. So, it would be overstating it to say they were uniquely responsible [for building their organization’s reputation] but they were quick to realize the value of it.
Silverthorne: Why is resiliency in particular so important in the context of emerging markets?
Khanna: There are many reasons why you can have the rug pulled out from under your feet in developing countries. You have capricious behavior on the parts of opportunistic people, if there are no checks and balances to prevent them from behaving in that way. You might have the bureaucracy or government officials randomly changing rules without due process or checks and balances. You might have, in extreme circumstances, maximum economic instability. Or you might have political instability; you might have unrest in the streets. There is a litany of reasons for why there is less predictability in the median developing country than in the median developed country. Resilience responds to this ambient situation of uncertainty.
Silverthorne: In developed economies with stable institutions, does reputation carry the same weight in terms of increasing longevity?
Geoffrey Jones: We certainly do not wish to imply that reputation does not matter in developed economies, including in facilitating longevity. There is little doubt that reputation, broadly defined, is part of the explanation why US corporations such as Citibank, GE, Ford, and IBM have continued in existence for a century or longer. Equally, it is evident that major reputational crises can inflict major damage on corporations in developed markets. One only has to think of the ongoing damage to the German auto manufacturer VW caused by the emissions scandal. However, in developed economies, there are typically fewer political and economic shocks that could have a life-threatening impact on a large corporation. There also are stronger institutions to verify and confirm the strength and legitimacy of corporations, from accounting auditors to effective government regulators.
Silverthorne: From your study, what are the practical lessons for business managers?
Jones: The bottom line for practitioners in developing countries is that they need to really see corporate reputation as a huge asset. It enables their firms to more fully utilize existing resources by decreasing uncertainty. It is an asset in good times and bad.
In the rough-and-tumble of business everywhere, let alone in conditions of turbulence where corruption may be the norm and not the exception, it may seem almost counterintuitive to believe that maintaining the highest standards, including ethical standards, is a way to remain competitive. This study suggests that it is in fact probably the only way to remain competitive in the long run. It is not an easy matter. Reputations take generations to build and can be hugely damaged by a single incident.
Silverthorne: What new ideas does your paper contribute to academic theory and business practice?
Jones: The theoretical contribution is to elaborate how a favorable reputation allows a firm to overcome and capitalize on the transaction uncertainty created by institutional voids. A unique aspect of the theory is that we highlight how reputation has both offensive and defensive properties, which makes it valuable to firms during both positive and negative economic cycles. Very few strategic constructs can work in both good times and bad.
“Considering that the company had already secured some success, we set out to find the reasons underlying that success and to determine what we had to preserve moving forward... So, we conducted a survey with our customers, workers, and suppliers... [and found that] clients relied on a company like Graña y Montero on account of its reputation, because it was a serious business. That was something we had missed.”
—Jose Graña Miró Quesada, Chairman of Graña y Montero (the oldest and largest construction company in Peru)
We propose reputation can be an antecedent that allows firms to engage in change. We suggest that reputation, at its core, provides stability; maintaining a favorable reputation engenders transactional confidence due to the stable informational cues it provides. We propose that it is this very stability that provides a springboard for firms to reorient resources in order to adapt to a changing environment. For example, when Mahindra had to lay off 500 people to adapt to changing market conditions, they could do so without interference from the community because of their favorable reputation, while layoffs by other firms elsewhere were met with unrest and angst.
The approach of the study is important, too. The discipline of strategy is not rich in longitudinal studies—too often “the long term” is defined as 10 years. This is important because drivers of long-term survival remain comparatively undertheorized. There is little theory on whether mechanisms of competitive advantage are sustainable, replicable, and relevant to survival that persists over generations and centuries. Nor are the journals replete with articles on emerging markets—despite their now huge importance in the global economy. The reason is that journal editors reward the authors of papers employing rigorous testing of rigorous datasets. Once you leave North America, Europe, and Japan, data becomes sparse, or less than rigorous.
The future lies in asking bigger questions about contexts other than the developed world. This will require the embrace of new sources of data, perhaps especially including digital data, including oral history. This paper is making a statement about the potential of embracing these new types of data, in a rigorous fashion.
This article was written by Sean Silverthorne from Harvard Business School Working Knowledge.