BUSINESS SPECIAL........................ 'Businesses can only succeed if they use Contextual Intelligence'

 'Businesses can only succeed if they use Contextual Intelligence'

Social scientists and leadership experts have always talked about the importance of context, but Tarun Khanna feels that it's a topic people studying management have not taken seriously enough.

In a recent article for the Harvard Business Review, he puts forth the idea of 'contextual intelligence' and why this is essential for business success across borders. "I've spent 15 years trying to understand how what we teach at Harvard is relevant to other parts of the world.

The article is meant to be a prescription for a more sensible approach,"says Khanna, Jorge Paulo Lehmann Professor at Harvard Business School and author of two books on emerging economies, Billions of Entrepreneurs and Winning in Emerging Markets.

Even when he sat in those same classrooms as a student in the 90s, Khanna wondered how what he was learning about management best practices would apply to his dad's business back in India.

While in the US it may be perfectly reasonable to offer a factory manager stock options or a high performance linked pay component as part of an employee motivation exercise, it's unlikely to work in Sao Paulo or Bangalore.

Trying to apply management processes uniformly across the world is likely to be a recipe for disaster unless the local context is factored in. Contextual intelligence then, is the ability to understand the limits of our knowledge and to adapt it to an environment different from the one in which it was developed.

While B-schools across the world might train future managers on the best practices to use in different situations, these can't be effectively implemented without understanding the local realities of the place where they are to be implemented.

"Until we acquire and apply this kind of intelligence, the failure rate for cross-border businesses will remain high. Our ability to learn from experiments unfolding across the globe will remain limited, and the promise of healthy growth worldwide will remain unfulfilled,"he says.

While the need to motivate employees and create value is at the heart of what managers do, the definition of value and how to motivate people changes significantly across geographies. What constitutes value will be determined by a mix of factors like economic development, educational norms and culture, among others.

Hence, contrary to popular belief it's actually about radically reworking processes rather than making minor changes to make them fit local conditions. While the base process or technology itself rarely needs to be tampered with, it's the other details surrounding it that change.

The challenge that most businesses face when preparing to enter a new market is that they've already found a winning formula to which they are averse to making too many changes. "Shifting into a new context may be straightforward if just one or two parts of the model need to change. But generally the adaptations required are far more complicated than that,"says Khanna.

This requires a mindset change across various levels, not just at the top but also in the employees who may be transferred from the home market to the new location. "It's not easy to tell someone to set aside what he has been doing successfully and to do it in a different manner,"he says. It needs a large degree of internalisation that only happens with time.

The first thing the leader needs to do is determine the characteristics of his business that would work in a new geography. "There's no recipe for this but there is a thought process to follow. You have to ask yourself certain kinds of questions,"says Khanna.

The most important question is "Why are we successful in our home country?"Chances are that you will end up with a long list of possibilities as you try and answer this question.

It could be because of your tight supply chain, strong branding, customer focus or innovation capabilities. Next you need to establish which of these factors are most sacred to you - something that you would never compromise on - and then ascertain which of these would work in the new geography that you are looking at entering.

This requires you to have some amount of detailed information about that destination. Once you know this, you can start building your strategy with the awareness that there might be other assets that you may have to sacrifice.

If maintaining a tight supply chain is non-negotiable, you may have to let go of the degree of customisation that you may be offering consumers in your home market. "This introspection forces you to answer what's central to your company's existence and why you have been successful. If you try and do everything you think you are good at there will be complete chaos. Once you have clarity on what you need, then you can experiment and find a model that works locally,"says Khanna.

While the general contours of strategy may remain the same, the specific details have to be tailored depending on the local context. Bangalore-based Narayana Health has revolutionised how it performs cardiac surgeries in India and earlier this year, it opened a facility in the Cayman Islands. It's Indian model is based on surgeons quickly acquiring expertise through the large number of patients they operate on.

It also involves having nurses double up as respiratory and occupational therapists. Additionally, the regulatory culture in India allows for experimentation. In the Caymans, the company will have to rework this model given the stricter regulatory systems and labour costs, but the early signs are encouraging.

For instance the construction practices honed in India have enabled Narayana to build a state-of the art hospital for much less than it would traditionally cost there. While it will hold on to its culture of innovation and experimenting, it will also have to adapt to the local conditions as it evolves a model that works for it in the Caymans.

The challenges in understanding the local context remain the same irrespective of whether it's a company from the developed world looking at launching operations in an emerging economy or the other way around. German retailer Metro Cash and Carry had already learnt a few things about local context when it had expanded to other parts of Europe and Russia before it launched operations in China.

While they did get a lot of things right, it wasn't all smooth sailing. A number of these challenges resulted from local tastes - for instance many consumers preferred buying live or freshly butchered animals - and it took the retailer 14 years to break even.

Similarly, in India it had to deal with the legal requirement that farmers had to sell all produce through government-run auctions. It was also the first time that the company couldn't find a single-point political authority who'd advocate for it. So while there had been a slew of learnings from other markets, not all lessons are applicable in other contexts.

Eventually the Metro managers found their feet but it was a process of slow experimentation. "Contextual intelligence can't be rushed or mandated into existence,"says Khanna.

Often, preconceived notions about things impact how we formulate our strategy around them. Khanna stresses the importance of experimenting in a new market to understand which of these biases are valid and which aren't. This needs building new frameworks and models and experimenting to see what really works.

This means even mega-corporations need to act like entrepreneurs and test assumptions cheaply and quickly to determine the way ahead. "Like entrepreneurs, companies shouldn't analyze experimental results to the point of exhaustion but instead develop the capacity to act speedily on results,"he says.

When it comes to formulating and implementing a strategy though, it's about the details. "The hard stuff is easy to do but the soft stuff is hard,"says Khanna. If you are selling shampoo in India and are considering launching it in Nigeria, you need to understand the local market first. Things like income distribution, retail infrastructure, inflation can easily be reduced to data.

It's also easy to outsource this kind of work. Understanding target consumer behaviours, needs and views on personal care and grooming —is it a necessity or a luxury— are tougher to understand in a new context and this is where experimenting helps .

Khanna points out that crossborder expansions are just one area where contextual intelligence can impact performance. It can easily apply to any other area where enterprises are trying to reach out to large numbers of people.

His advice to leaders is to engage in introspection with key employees and understand what defines their company. The other thing is to invest in high potential employees in specific local contexts. "Most senior managers in emerging economies tend to be short sighted and do not invest in their key people. You need to expose them to different situations, whether through training and development programmes, sending them outside or through interactions with partners,"he says.

This way they develop their contextual intelligence which helps them function more effectively in new geographies. The last thing is to be humble about what you know and don't know. It's a human bias to put a lot of emphasis on personal or recent experiences and it needs some self-awareness to recognise that this might not necessarily transfer or be applicable in other situations.

It requires a change in mindset. Once leaders realise that they need to unlearn some of what they know and be open to a new point of view, they'll find that cross-border ventures are a lot easier and a lot more successful than before.

CDET 140919