Can you Succeed in the Bottom Right Corner?

By Anonymous

Emerging Economy, Greenfield Situation, Chaotic Governance, Entrepreneur

Emerging Economy, Greenfield Situation, Chaotic Governance, Entrepreneur

The matrix proposed by Prof. Macomber titled “How to Invest in Sustainable, Competitive Cities” points to the bottom right cell as one with the greatest potential opportunity. At a first glance this “opportunity” does not make sense: Who would want to be an entrepreneur investing in greenfield developments in regions with chaotic governance?  However, while thinking about this framework in the context of bringing order to chaotic situations with a lot of activity, one extremely successful business comes to mind. It does not erect the kind of barriers to entry that most HBS MBA students think about.

Business_Models

Bahria Town Pakistan is the promoted by one of the largest real estate developers in the country, with experience building housing societies in the cities of Lahore and Rawalpindi. They are in the process of developing a number of other sites around the country. The founder of the company, Mr Malik Riaz Hussain, has risen within two decades from obscurity to becoming one of the richest men in the country. So how was Mr Hussain able to exploit this opportunity and overcome some of the hurdles inherent in investing in a high-risk environment? One can argue that there were two aspects to this rise, which can be generalized as follows:

  1. Provide services for which residents are willing to pay a premium: The value proposition of Bahria Town developments is that its communities provide services that would generally be the remit of the state, but which the state  has failed to provide. Examples include security (Bahria Town developments are gated communities with high emphasis on security); reliable utilities and municipality services (the developments have their own power supply); and high-quality amenities (the communities are self-contained with schools, hospitals and shopping areas). Bahria Town developments, like the one in Ho Chi Minh City and unlike KAEC, are satellites to major cities where the majority of residents work.
  2. Ensure incentives of other powerful stakeholders are aligned with yours: This is extremely important in countries with chaotic governance where there are likely to be multiple centres of power. Bahria Town is said to employ retired military personnel as security advisers and senior consultants thereby keeping the country’s most formidable institutions interests aligned with the company’s. In addition, it is thought that a number of politicians, including the country’s President, bureaucrats and journalists have properties in Bahria Town developments.

While the strategy seems to have been immensely successful financially and Bahria Town developments are regarded as quality developments, this has not been without controversy. Currently there are a number of litigations in the country’s courts against Bahria Town. The nature of business dealings between state functionaries and the company are also suspect, according to press reports and rumors.  (The Nation, Feb 27, 2013)

It can also be argued from an urban planning point of view that this kind of segmented development is not good for society as a whole, and that it leaves the poor behind.

Bahria Town’s success exemplifies opportunities that the confluence of lack of governance and need for development can offer. In this instance, it seems takes a certain type of entrepreneur (paraphrasing Prof. Macomber – the Tony Soprano sort) to exploit these opportunities [Presumably because of the controversial nature of the relationships, not because of the viability of the economics of the deals – John M].

I am highly skeptical that this sort of entrepreneurial spirit should be promoted but then again much of the US’s own infrastructure in the 19th century was built by those who were then disparaged as “robber barons”. In my mind a much better way of attracting developers for greenfield opportunities would be to strengthen regulation and state institutions. If that institutional strength doesn’t materialize, then those willing to exploit weak governance and willing to take on the risks inherent in working in such an environment will create their own rules and will capture significant economic (and real estate) rents in the process. 

Ref:

http://www.bahriatown.com/

http://www.nation.com.pk/pakistan-news-newspaper-daily-english-online/letters/27-Feb-2013/lda-versus-bahria-town

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One thought on “Can you Succeed in the Bottom Right Corner?

  1. By John Macomber

    Maybe this is a question of who (or what) fills in when there are institutional voids. Profs. Tarun Khanna and Krishna Palepu have written extensively about this. HBS Working Knowledge has a nice summary here: http://hbswk.hbs.edu/item/6424.html

    “Emerging markets such as the BRIC countries—Brazil, Russia, India, and China—entice and intimidate. When managers are asked what is special about emerging markets, they typically point to rapid economic growth, potential competitors, and vexing problems including but not limited to corruption, financial crises, and weak intellectual property rights.

    [Khanna and Palepu], authors of the new book Winning in Emerging Markets: A Road Map for Strategy and Execution (Harvard Business Press), offer an actionable framework to help potential entrants answer the following key questions:

    – In this particular market, which market institutions are working, and which institutions are missing?
    – Which parts of our business model can be adversely affected by these institutional voids?
    – How can we build competitive advantage based on our ability to navigate institutional voids?
    – How can we profit from the structural reality of emerging markets by identifying opportunities to fill voids, serving as market intermediaries?

    For Khanna and Palepu, an emerging market is anyplace where buyers and sellers cannot easily and efficiently do business with each other….

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