Reinventing Strategies for Emerging Markets

PERSPECTIVE

Reinventing strategies for emerging markets:

beyond the transnational model

Ted London1 andStuart L Hart2

1Kenan-Flagler Business School, University ofNorth Carolina, Chapel Hill, NC, USA; 2Johnson

School of Management, Cornell University,

Ithaca, NY, USA

Correspondence:T London, Kenan-Flagler Business School,University of North Carolina, Chapel Hill,NC 27599-3490, USA.Tel.: þ1 919 962 4259;Fax: þ1 919 962 4266;E-mail: [email protected]

Received: 19 June 2003Revised: 22 January 2004Accepted: 13 May 2004Online publication date: 19 August 2004

AbstractWith established markets becoming saturated, multinational corporations

(MNCs) have turned increasingly to emerging markets (EMs) in the developingworld. Such EM strategies have been targeted almost exclusively at the wealthy

elite at the top of the economic pyramid. Recently, however, a number of

MNCs have launched new initiatives that explore the untapped market

potential at the base of the economic pyramid, the largest and fastest-growingsegment of the world’s population. Reaching the four billion people in these

markets poses both tremendous opportunities and unique challenges to MNCs,

as conventional wisdom about MNC global capabilities and subsidiary strategyin EMs may not be appropriate. How MNCs can successfully enter these low-

income markets has not been effectively addressed in the literatures on global

and EM strategies. An exploratory analysis, involving interviews with MNCmanagers, original case studies, and archival material, indicates that the

transnational model of national responsiveness, global efficiency and world-

wide learning may not be sufficient. Results suggest that the success of

initiatives targeting low-income markets is enhanced by recognizing thatWestern-style patterns of economic development may not occur in these

business environments. Business strategies that rely on leveraging the strengths

of the existing market environment outperform those that focus on over-coming weaknesses. These strategies include developing relationships with

non-traditional partners, co-inventing custom solutions, and building local

capacity. Together, these successful strategies suggest the importance of MNCsdeveloping a global capability in social embeddedness.

Journal of International Business Studies (2004), doi:10.1057/palgrave.jibs.8400099

Keywords: global capabilities; transnational; emerging economies strategy; low-incomemarkets; base of the pyramid

Everyone wants brands. And there are a lot more poor people in the world than

rich people. To be a global business and to have a global market, you have to

participate in all segments.

– Keki Dadiseth, Director, Hindustan Lever Limited (Unilever’s India sub-

sidiary), discussing his company’s efforts to target the rural poor.

IntroductionWith developed world markets becoming increasingly saturated,multinational corporations (MNCs) have turned to emergingeconomies such as India, Indonesia, Brazil, China, and Mexico,as key locations for future growth. In their efforts to enter thesemarkets of the future, most MNCs have focused on the wealthy

Journal of International Business Studies, 1–21& 2004 Palgrave Macmillan Ltd. All rights reserved 0047-2506 $30.00

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elite at the top of the economic pyramid, withproducts and business models similar to those usedin the developed world (Arnold and Quelch, 1998;Prahalad and Lieberthal, 1998). This has resulted, asPrahalad and Lieberthal (1998) note, in MNCsusing an ‘imperialist mindset’ to sell existingproducts to established upscale markets in emer-ging economies.

By focusing on wealthy consumers and partnerorganizations who participate in the formal econ-omy, however, these firms are seeing only the tip ofthe proverbial iceberg. Almost completely ignoreduntil recently is a huge base of potential customerswhose annual purchasing power parity (PPP) is lessthan $1500 per year, a market aptly termed thebottom (or base) of the pyramid by Prahalad andHart (2002). Low-income markets in emergingeconomies present both tremendous opportunitiesand unique challenges. There can be little doubtthat the four billion customers in these base-of-the-pyramid markets represent a vast potentialuntapped market opportunity. MNCs, however,may not be able to rely on capabilities in globalefficiency and national responsiveness to incre-mentally adapt current products and extend exist-ing business models. Similarly, emerging economystrategies that emphasize overcoming limitations inthe business environment may be viable only inhigh-income markets that are integrated into theglobal capitalist system.

In spite of these apparent challenges, however, agrowing number of MNCs are now beginning torecognize and explore the enormous businessopportunity at the base of the economic pyramid(Hart and Milstein, 1999; Prahalad and Hart,2002).1 Firms such as Unilever and Hewlett-Pack-ard, for example, have made public commitmentsto generate a sizeable portion of their revenuesfrom these markets (Ellison et al., 2002). Yet, whileMNCs are increasingly viewing low-income mar-kets in developing countries as potential sources offuture growth, there is almost no empirical researchon strategies for pursuing these opportunities. IfMNC entry into these markets challenges existingtheories on global capabilities and emerging market(EM) strategies, this gap in research is becomingincreasingly untenable. It may be necessary toreinvent strategies for EMs if firms are to success-fully serve the vast low-income markets at the baseof the pyramid.

In studying such situations, an exploratoryapproach focused on theory building is mostappropriate (Eisenhardt, 1989). This matches the

research methodology that has been used to studyMNC subsidiary initiatives (Birkinshaw, 1997) andcorporate venturing (Burgelman, 1983). A qualita-tive empirical study was therefore used to examinehow MNCs as well as other enterprises are pursuingopportunities in base of the economic pyramidmarkets, and which strategies appear to be mostsuccessful.

In presenting this study, we first outline theunique opportunities and challenges for MNCsassociated with low-income markets in emergingeconomies. We then review the internationalbusiness (IB) literature focused on global and EMstrategy, and highlight the strengths and limita-tions of these theories when applied at the base ofthe economic pyramid. Next, we describe theresearch design and methods for the study; this isthen followed by a discussion of the results of ouranalysis of interviews with MNC managers, casestudies, and archival data. We conclude by distillingthe theoretical insights that emerged from thisstudy and discussing the implications for research-ers and practitioners.

The base of the economic pyramid:opportunities and challengesThe opportunities associated with low-incomemarkets are becoming increasingly apparent toboth scholars and managers. There is clearly morethan meets the eye when considering customerswith annual purchasing power parity (PPP) of$1500 or less (Prahalad and Hart, 2002). The vastmajority of the populations operate primarily inthe large, but hidden, informal economies that arenot recorded in official gross national product(GNP) or PPP statistics.2 Across the globe, it hasbeen estimated that the informal sector includesmore than $9 trillion in hidden (or unregistered)assets, an amount nearly equivalent to the totalvalue of all companies listed on the 20 mostdeveloped countries’ main stock exchanges (deSoto, 2000: 35). In addition to assets, the value ofeconomic transactions in these markets may matchor even exceed what is recorded in the formaleconomic sectors in developing countries (Hender-son, 1999).

In Mexico, for example, the informal economyrepresented roughly 30–40% of the economicactivity in the country in the late 1980s, and hascontinued to grow rapidly (de Soto, 2000: 78).Beyond the desire to hide illicit activities, theincentives encouraging entrepreneurs to participatein the informal, as opposed to the formal, economy

Strategies for emerging markets Ted London and Stuart L Hart

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Journal of International Business Studies

are fundamentally different in the developed worldfrom those in the developing world. In developedcountries the informal economy is much smaller,and a primary objective is to evade taxes (TheEconomist, 1999). In the developing world, on theother hand, it is simply too costly or complicatedfor many entrepreneurs to enter the formal econ-omy. For example, de Soto (2000) found that ittakes 289 days and $1231 to register a business inPeru. As a result, in emerging economies, theinformal, or extralegal, sector plays a different andmore substantial role than what is found in thedeveloped world.

Concealed below the surface of the GNP and PPPnumbers, therefore, is an immense and fast-grow-ing economic system that includes a thrivingcommunity of small enterprises, barter exchanges,sustainable livelihoods activities, subsistence farm-ing, and unregistered assets (Chambers, 1997).Furthermore, most entrepreneurs and customersin base-of-the-pyramid markets are poorly servedby low-quality vendors or are actively exploited bypredatory suppliers and intermediaries, suggestingthe possibility of generating both profits andconsumer surplus (Prahalad and Hammond,2002). Clearly, serving base-of-the-pyramid custo-mers, who number approximately four billionworldwide, offers tremendous opportunities. How-ever, they also present unique challenges to MNCslooking for new markets.

Social contracts and social institutions dominateEntering low-income markets in emerging econo-mies may require a different strategic approach.Reaching these markets involves bridging theformal and informal economies. In the informaleconomy, relationships are grounded primarily onsocial, not legal, contracts (de Soto, 2000), and theorganizations with the most expertise in servingthese markets – government and civil society – havea strong social orientation (Aturupane et al., 1994;Chambers, 1997; Sen, 1999). As de Soto (2000: 163)highlights with his story about listening to the‘barking dogs’ in low-income markets, informalsocial boundaries often dominate over formal legaldocumentation. In these environments, althoughformally registered property ownership may notexist, the local dogs demonstrate that boundariesare recognized and protected. The dogs bark onlywhen someone passes by or crosses extralegalboundaries recognized in the informal economy.Clearly, boundaries exist and are respected. Success-fully operating in this business environment

requires a capability to understand and appreciatethe benefits of the existing social infrastructure(Chambers, 1997).

Indeed, organizations that value and leverageexisting social capital have achieved success inthese markets. Many of the most successful micro-loan programs targeting the poor, for instance, relyon group lending and peer pressure to ensurepayback. If one person in the group defaults, noone else in that group is eligible for a future loan.When used in low-income markets in the develop-ing world, this novel design has created paybackrates that even banks in the developed world wouldenvy. However, when transferred to the inner cityin the US, this model has been a failure (Buntinet al., 1996), illustrating that unique social institu-tions operate in the informal economy in develop-ing countries.

Traditional partners may lack relevant experienceIn their efforts to protect proprietary technologyand knowledge, MNCs have tended to partner withthe minority of individuals and businesses in thedeveloping world that participate in the formaleconomy, understand the global capitalist system,and value Western products (de Soto, 2000). Localpartners come from a relatively small subset oforganizations – typically large domestic firms,government entities, or a combination of both,such as state-owned enterprises – whose primarybusiness experience is centered on dealing with thelocal, and mainly urban, elite.

However, economic development at the base ofthe economic pyramid may not follow familiarpatterns found in the developed world (Arnold andQuelch, 1998; Hammond, 1998). As the Nobel prizewinning economist Joseph Stiglitz suggests, thefailure of the world’s global financial institutions intheir efforts to facilitate economic developmentthat is more inclusive demonstrates the dangers ofrelying on traditional players and their limitedviews of what is appropriate and effective (Stiglitz,2002). Non-profit organizations and other sociallyoriented institutions can play an important role inbusiness development (Rondinelli and London,2003), especially in developing countries (Hartand Sharma, 2004). Grameen Bank and GrameenPhone, for instance, have combined commercialand non-profit operations to successfully providebanking and cellular services to rural areas inBangladesh (Richardson et al., 2000), and the non-profit organization the Solar Electric Light Fund,together with for-profit partners, has been active in


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developing commercially viable electrification pro-grams for the rural poor in Asia (Sonenshein et al.,1997).

Societal performance mattersFinally, there is increasing pressure for corporationsto take a greater role in addressing global societalissues such as eradicating poverty and environ-mental protection in developing countries. As theliterature on global sustainable development indi-cates, the pressure on MNCs to create a moreinclusive capitalism is mounting (Hart and Chris-tensen, 2002). The fact that the developed worldconsists of 20% of the population, yet uses 80% ofthe world’s resources, however, suggests that raisingthe economic condition of those in the developingworld will require a different model of development(Hart, 1997).

Indeed, the World Summit on SustainableDevelopment in Johannesburg, the anti-globaliza-tion demonstrations in Davos, Prague, Seattle,Washington, DC, and Cancun, and the increase inintra- and cross-border tensions highlight the factthat the growing discontent of the world’s poor canno longer be easily ignored by global institutionsand companies (Stiglitz, 2002). Global firms andinstitutions are therefore increasingly beingexpected to consider the societal and environmen-tal impacts of their activities (Soros, 2002). Asanother Nobel prize winning economist empha-sizes, a crucial aspect of this effort is the develop-ment of human capabilities that build economicand political freedom (Sen, 1999). This integratedapproach to economic development and povertyalleviation is especially important in low-incomemarkets where economic, social, and environmen-tal considerations are so closely intertwined(Chambers, 1997; Sen, 1999; World Bank, 2001).Firms without a capacity to appreciate and createsocial value or to become locally embedded in thesocial infrastructure that dominates low-incomemarkets may struggle to overcome their liability offoreignness.

Gaps in existing IB theoryOver the past several decades, corporations havegained increasing experience in expanding theiroperations in foreign markets, and the literature onEMs and global strategy has also grown. However,most MNC investment has been targeted at devel-oped countries (Arnold and Quelch, 1998; Sachs,1998); these countries are also the context for mostIB research (see the excellent review by Tallman,

2001). For example, most of the research onsubsidiary entrepreneurship has focused on devel-oped countries in North America and Europe(Birkinshaw, 1997; Frost, 2001; Andersson et al.,2002), limiting the generalizability of this theore-tical stream to countries at the same stage ofeconomic development and having the samecultural orientation toward entrepreneurship(Hofstede, 1993; Busenitz et al., 2000).

EM strategyMost research by management scholars on firmstrategies in emerging economies suffers from asimilar limitation: a pre-occupation with strategiesthat seek to overcome the lack of a Western-stylebusiness environment (Peng, 2001). Even whenserving top of the pyramid customers, operating inemerging economies is challenging as the rule oflaw is often poorly enforced (Hoskisson et al.,2000). MNCs accustomed to creating competitiveadvantage through patents, brands, and contractsare wary of entering markets where their proprie-tary technology and knowledge cannot be pro-tected through enforceable legal mechanisms(Delios and Henisz, 2000).

To address this uncertainty, MNCs entering thesemarkets look for ways to overcome limitations inthe business environment. Firms design boundariesto protect internal resources and capabilities fromunintended spillover, and look for partner organi-zations that wield substantial capability to fill voidsin the business environment (Dunning, 1988;Khanna and Rivkin, 2001). Indeed, a wide varietyof international management scholars haveadopted the ‘Westernization’ assumption in theirresearch: while waiting for a more Western-styleeconomy to develop, they explore how MNCmanagers can successfully implement strategiesthat help to overcome the lack of legal boundariesand difficulties in property rights protection. Forexample, researchers have examined how firms canaddress gaps in the business environment throughforming alliances (Beamish, 1987; Hitt et al., 2000),joining networks (Khanna and Rivkin, 2001), usinginterpersonal ties (Peng and Luo, 2000), or mana-ging firm boundaries (Delios and Henisz, 2000).

More specifically, Hoskisson et al. (2000), in theirintroduction to a special issue in the StrategicManagement Journal on emerging economies,emphasize that developing country adaptation toWestern practices is crucial to attracting investmentby MNCs from the developed world. In discussing


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foreign direct investment (FDI), the authors pro-pose that

The primary impediment appears to be the lack of well-

defined property rights that convey exclusivity, transfer-

ability, and quality of titley As a result, institutional

capacity building was, and continues to be, key for

attracting inward FDI (Hoskisson et al., 2000: 252).

This perspective assumes that over time the localbusiness environment will evolve into an economicsetting that is familiar to Western managers: legalcontracts will supersede social ones and competi-tive advantage will be grounded in the ability toprotect resources and knowledge from unintendedleakage outside firm boundaries. In the meantime,firm managers should develop strategies that over-come the current weaknesses in this environment.This view, however, relies on an implicit assump-tion about EMs. As Arnold and Quelch (1998: 9)make clear:

In particular, our field research suggests that MNCs often

erroneously adopt a ‘less developed countries’ mindset,

assuming that these markets are at an early stage of the same

development path followed by the advanced or developed

countriesy and that market evolution patterns seen pre-

viously in developed economies will be replicated in EMs.

MNC managers and academics must move beyondthe ‘imperialist mindset’ that everyone must want tolook and act like Westerners (Prahalad and Lie-berthal, 1998). While it can be argued that thewealthiest fraction of the population in emergingeconomies participates in a capitalist system that isevolving toward a more Western-style businessenvironment, the vast majority of the people areon the outside looking in (de Soto, 2000). Thissuggests that, at the very least, there are two differentand important patterns of economic developmentoccurring in most emerging economies. In fact, theinformal economy may account for as much as 30–60% of the total economic activity in some devel-oping countries (de Soto, 2000), meaning that asubstantial amount of business activity in low-income markets is conducted outside the officiallaw, with informal social contracts being used asbinding arrangements.

Global strategyResearchers have suggested that, in pursuing top-of-the-pyramid markets in emerging economies,MNCs can rely on proven global capabilities toincrementally adapt existing business models and afamiliar subsidiary strategy based on controllingresources, extracting knowledge, and leveraging

economies of scale and scope (Bartlett and Ghoshal,1989). Internalization, or the modifying (nationalresponsiveness), leveraging (global efficiency), orsharing (worldwide learning) of existing productsor resources within firm boundaries will allowMNCs to overcome liabilities of foreignness inserving the wealthy top of the pyramid (Hymer,1976; Buckley and Casson, 1991).

This approach implicitly assumes that all marketswithin a country are following a similar pattern ofeconomic development, and that MNCs using thetransnational model can effectively leverage capabil-ities in global efficiency, national responsiveness,and knowledge transfer to maximize economicbenefits in all business environments (Bartlett andGhoshal, 1989). The success of distributed energyand micro-loan ventures, however, suggests thatsmall-scale, decentralized initiatives may make moresense in low-income markets than the developedworld mantra of centralization of control andeconomies of scale (Christensen et al., 2001). Inaddition, boundary-protecting strategies are lesslikely to be effective in low-income markets wheresocial benefits influence economic decisions (Ken-nedy, 2001) and where shared use of property iscommon and blurs ownership boundaries (Cham-bers, 1997). In these EMs, MNC knowledge andresources are unlikely to be successfully protectedthrough patents or brands (McDonald et al., 2002).

Although the transnational approach remains themost influential model of global strategy (Tallman,2001), others have argued that firms operateprimarily either as global companies leveragingeconomic efficiencies or as multidomestic organi-zations that allow their subsidiaries to competeindependently in different countries (Hout et al.,1982). MNC strategy is viewed as either exploitingeconomic efficiencies through economies of scaleor encouraging national responsiveness by adapt-ing to local conditions – or a mix of the two (Doz,1980). Researchers, using data from MNC practices,have explored which country-level strategy is thebest fit for a subsidiary (Ghoshal and Nohria, 1989).This view is potentially representative of effectiveglobal strategy in top-of-the-pyramid markets, butit ignores within-country differences in businessenvironments and implicitly assumes that capabil-ities developed at the top of the pyramid will beviable across all prospective markets.

In a similar manner, international marketers havealso recognized the need to consider both globalefficiencies and local adaptation in segmentingconsumer markets. The challenge is to find global


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similarities that can be leveraged across multiplecountries while adapting to local differences asneeded (Hassan and Kaynak, 1994). Two interestingapproaches to global segmentation have beenproposed. One is to cluster countries along similardimensions, with firms being encouraged to con-centrate on one cluster, or subset of countries, at atime (Moskowitz and Rabino, 1994; Oyewole,1998). A second strategy is to look for globalsegments that transcend national and culturalboundaries (Hassan and Katsanis, 1994). Althoughthis second approach recognizes within-countrydifferences, the emphasis is on segmenting top ofthe pyramid customers more finely, such as theglobal elite and the global teenager (Hassan andKatsanis, 1994). Expected behaviors in these seg-ments are typically modeled after Western valuesand lifestyles. In both segmentation approaches thefocus is on leveraging knowledge and skills devel-oped in and for top-of-the-pyramid markets.

In sum, emerging economies should not beviewed as following a homogeneous pattern ofeconomic development in which all markets areevolving toward a more Western-style businessenvironment. Although the wealthy elite in thesecountries may participate in global capitalism, thevast majority of the population has been excluded

from this economic system. Indeed, as Dawar andChattopadhyay (2002) observe, it makes little sensefor MNCs to think in terms of distinct ‘countrystrategies’ (e.g., China strategy) in the context ofEMs. Instead, it might be more appropriate todevelop separate strategies for wealthy, risingmiddle class, and poor customers across countrymarkets (Hart and Milstein, 1999). Hence, entryinto base-of-the-pyramid markets may require aglobal capability beyond the adaptive skills ofnational responsiveness or the centralized controlinherent in global efficiency, and a market entrystrategy that moves past a reliance on importedbusiness models based on extracting knowledgeand protecting and controlling resource flows. Thiscreates challenges for MNCs, and, as Monsanto’sand Unilever’s experiences illustrate, firms havehad mixed success in pursuing low-income marketsin developing countries (see Exhibit 1).

Yet, although an increasing number of firms areexploring the economic opportunities at the base ofthe pyramid, there is little in the way of theory orresearch in the area of IB that provides clearguidance on how to pursue these EMs. Indeed, itseems apparent that there is a serious gap in theexisting literature when it comes to global capabil-ities and business strategy at the base of the

Exhibit 1 Monsanto and Unilever at the base of the pyramid: two corporate examples

Monsanto: unsuccessful at the base of the pyramid

In the mid-1990s Monsanto launched an effort to transform itself into a life science company with a strong focus on agricultural

biotechnology (Simanis and Hart, 2001). Emphasizing genetic engineering, Monsanto tried to reinvent the agricultural industry. As

part of this effort, Monsanto saw an opportunity to use genetically modified organisms (GMOs) to address the food and nutrition

needs in low-income markets in the developing world.

Targeting local farmers in emerging economies provided a potential avenue for growth while simultaneously cultivating good public

relations. What Monsanto failed to realize, however, was that low-income farmers in emerging economies typically rely on using saved

seed for the next planting season. As a result, Monsanto’s strategy to use sterilized seeds to prevent pirating of the firm’s intellectual

property upset both these farmers and NGO activists. Indeed, this technology was viewed as an affront to cultural traditions in many

emerging economies. This, combined with well-publicized concerns about GMOs in Europe, created a backlash against the company.

The arrogance of this approach was later noted by CEO Robert Shapiro in a speech in October 1999. However, by then it was too late,

and support for Monsanto’s genetically modified seeds had collapsed.

Unilever: successful at the base of the pyramid

In contrast, Unilever’s Indian subsidiary, Hindustan Lever Limited (HLL), has been extremely successful with its strategy to serve base-

of-the-pyramid markets (Ellison et al., 2002). HLL uses a wide variety of partners to distribute its products, and also supports the efforts

of these partners to build additional capabilities. For example, HLL provided opportunities and training to local entrepreneurs, and was

not afraid to experiment with new types of distribution, such as selling via local performers and village street theaters (Balu, 2001).

In addition, managers were also aware that existing biases about the process of local economic development could be constraints as

the firm entered new low-income markets. They therefore required new employees to spend 6 weeks living in these markets, and

actively sought local consumer insights and preferences as they developed new products. By encouraging a creative and flexible

market entry process, HLL has been able to generate over $1 billion in revenues from operating in low-income markets in India alone

(Ellison et al., 2002).


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economic pyramid. This highlights an importantand increasingly untenable discontinuity betweenMNC practices and academic research.

Research methodsGiven the relatively new and unexplored nature ofthe phenomenon – the launching of businessventures in low-income markets in developingcountries – this study adopted an exploratoryresearch strategy (Yin, 1984; Eisenhardt, 1989).Qualitative research, rather than traditional quan-titative empirical tools, is particularly useful forexploring implicit assumptions and examining newrelationships, abstract concepts, and operationaldefinitions (Bettis, 1991; Weick, 1996). The objec-tive was to conduct an analysis of firm strategies forlow-income markets in emerging economies thatwould help to build theory on how companiessuccessfully enter these business environments andto develop constructs that would facilitate futurehypothesis testing (Eisenhardt, 1989).

The initial research questions provided guidancefor this study and helped us to identify meaningfuland relevant activities (Yin, 1981). More specifi-cally, this included collecting data on the back-ground and success of each venture, strategies usedto enter low-income markets, product design anddevelopment, knowledge transfer and sharing, theleveraging of existing capabilities, and inter-orga-nizational relationships. The research was con-ducted over a period of 3 years and involvedtriangulation among a variety of different sourcesof data including analysis of archival materials,evaluation of both original and existing casestudies, and the conducting of formal and informalinterviews with managers at a number of MNCs(Yin, 1984).

An exploratory methodology such as this hasbeen recognized as being particularly useful forresearchers interesting in examining strategies inemerging economies (Hoskisson et al., 2000). Inaddition, qualitative research has provided criticalinsights into innovation (Galunic and Eisenhardt,2001), entrepreneurship (Miner et al., 2001), andalliances (Larson, 1991, 1992), as well as a variety ofother phenomena, such as social issues (Dutton andDukerich, 1991), organizational change (Smith andZeithaml, 1996), and proactive responsiveness toenvironmental uncertainty (Sharma and Vreden-burg, 1998).

Data collection involved several overlappingsteps (Yin, 1984). Beginning in 2001, two researchassistants conducted an exhaustive search for

existing cases and other archival information onbase-of-the-pyramid market entry by multina-tionals, local companies, and non-governmentalorganizations (NGOs). In addition, from 2001–2003, 24 such ventures were selected for furtherin-depth analysis, which included collecting archi-val material and, where possible, contacting keyinformants. Written cases for each venture wereprepared by teams of MBA students as part of acourse focusing on business strategy at the base ofthe pyramid conducted by the authors (see Table 1for a list of these ventures).

These ventures were not selected randomly,rather they were chosen because they offered avariety of different approaches to exploring oppor-tunities in base-of-the-pyramid markets (Eisen-hardt, 1989). Both Western and local (indigenous)for-profit ventures were examined. In addition,non-profit (NGO) ventures were included in thesample, as these organizations play an importantrole in facilitating income-generating initiatives inareas where there has been limited economicdevelopment (Sonenshein et al., 1997; Richardsonet al., 2000). Finally, we selected cases to ensureappropriate geographical and cultural diversity,including ventures from Asia, Africa, and LatinAmerica.

Concurrent with the collection and analysis ofthe archival materials and case studies, interviewsand discussions were held with managers atMNCs engaged in launching business venturesin low-income markets. Extensive discussionswere held during 2001–2003 with MNCs involvedin a business school-based think tank focusedon base-of-the-economic-pyramid markets. MNCsinvolved included DuPont, Hewlett-Packard,Ford, Procter & Gamble, Motorola, Johnson &Johnson, Coca-Cola, Dow Chemical, Unilever,and Nike.

In addition, four MNCs were specifically includedas part of this exploratory study. These four wereselected because they were highly active in pursu-ing opportunities at the base of the pyramid inemerging economies, and allowed the investigatorsextensive access to these ventures over an extendedperiod of time. In addition, all four MNCs producedproducts for the consumer sector, which meantthat they faced similar challenges regarding sour-cing, production, distribution and marketing.Furthermore, the four were US-headquartered com-panies, which helped control for any differences inhome country (‘national diamond’)-based compe-titive advantages (Porter, 1990).


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With one MNC (MNC #1), a company withapproximately $9 billion in annual revenues,discussions were held over a period of about 18months, starting in mid-2001. The focus was on alow-income market venture that the company hadlaunched in 1999 in a large developing country inAsia. At a second MNC (MNC #2), a companywhose products are sold in more than 100 coun-tries, a series of interviews were conducted over aperiod of about 12 months with two managersactively involved in initiating base-of-the-pyramidventures in South America and Asia. With the thirdMNC (MNC #3), which has affiliates in more than50 countries, intensive discussions were held withtwo managers over a period of several monthsduring 2002 as they prepared to launch a newinitiative targeting a Latin American low-incomemarket. At the fourth MNC (MNC #4), a Fortune 50company that has had overseas operations for morethan 50 years, discussions with three managerswere conducted for about 2 years regarding base-of-the-pyramid ventures in Asia and South America.

To encourage greater disclosure of information,we assured the respondents that confidentialinformation would not be attributed to specific

low-income market ventures. Where possible,material on the organization and the venture wascollected and reviewed in advance. These inter-views, together with the case studies and otherarchival material, were compared and contrasted inan exploratory manner. Partially ordered data dis-plays were used to help in the data analysis andreduction process (Miles and Huberman, 1984). Forexample, once case studies had been developed andcoded, the different initiatives were ordered by levelof success and placed on the vertical axis. On thehorizontal axis we listed various strategies, capabil-ities, and activities for these initiatives. These datadisplays facilitated both within- and cross-caseanalysis (Miles and Huberman, 1984). The emer-ging results were then compared with existingtheory (Eisenhardt, 1989). As we iterated back andforth between existing theory and our findings, thedisplays and our conclusions were updated andrefined (Huberman and Miles, 1994). The results ofthis analysis are discussed below.

ResultsThe analysis of the archival material, case studies,and interviews all pointed to important differences

Table 1 Background information on 24 original case studies

Organization name Type of

organization

Western or local

organization

Region Successful or unsuccessful

in reaching base of the pyramid

Ahold (Sustainable Assistance) For profit Western Africa Unsuccessful

Alpina For profit Local Americas Unsuccessful

AmaZoncoop Not for profit Local Americas Unsuccessful

Amazon Life (Treetap) For profit Local Americas Successful

Cemex (Patrimonio Hoy) For profit Local Americas Successful

CMPC For profit Local Americas Unsuccessful

DFCU Leasing For profit Local Africa Unsuccessful

Freeplay Energy Group For profit Local Africa/Asia Unsuccessful

Hand Made in America Not for profit Western Americas Successful

Honey Care For profit Local Africa Successful

Hydraform For Profit Local Africa Successful

Indigenous Designs For Profit Western Americas/Asia Unsuccessful

Kenya Ceramic Jiko Not for profit Local Africa Successful

N-Logue For profit Local Asia Successful

PEOPLink Not for profit Western Americas Unsuccessful

Pot-in-Pot Refrigeration Not for profit Local Africa Successful

Protela For profit Local Americas Unsuccessful

Seawater Farms For profit Western Africa Unsuccessful

SELCO For profit Western Asia Successful

TARAHaat Not for profit Local Asia Successful

Tiviski Dairy For profit Local Africa Successful

Utz Kapeh Foundation Not for profit Western Americas Unsuccessful

WorldSpace For profit Western Africa/Asia Unsuccessful

WorldWater Corporation For profit Western Asia/Africa Unsuccessful


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between low-income markets in emerging econo-mies and top-of-the-pyramid markets involving thewealthy and elite. In particular, the interviews withMNC managers shed substantial light on thelimitations of the transnational model for compa-nies interested in exploring base-of-the-pyramidmarkets, and the case studies and archival materialsrevealed critical success factors for entering theseemerging, low-income markets.

Learnings from MNC interviews: limitations to thetransnational modelThe interviews with MNC managers were especiallyimportant when it came to critically evaluating therole of global capabilities in successfully launchingnew ventures targeting low-income markets inemerging economies. They helped to clarify and

elucidate the weaknesses and shortcomings asso-ciated with received theory in the area of globalstrategy. These findings are summarized in Table 2and discussed below.

The venture manager at MNC #1, for example,indicated that his company’s entry into a low-income market failed due, in significant part, totheir misjudgment of the market environment. Thecompany felt that it could rely on old technology,existing performance metrics, and minor adapta-tions to its familiar distribution channels andtechniques for communicating with potential cus-tomers. As it turned out, the venture was unable toreach its target market effectively, as it was relyingon inappropriate assumptions about market devel-opment. Although they levered their expertise by‘leading with the product’, the technology used was

Table 2 Limitations of the transnational model: analysis of interviews with MNC managers

MNC #1

Lessons

Transferring existing metrics and relying on existing relationships did not work

Relying on existing product development knowledge restricted the design process

Findings regarding global capabilities

Global efficiency: Leveraging existing knowledge was not an effective strategy

National responsiveness: Adapting existing resources to local environment did not work

Implications: Inability to understand local context doomed venture

MNC #2

Lessons

Local subsidiary did not understand low-income market context

Moving forward required surfacing biases at the subsidiary level


National responsiveness: Adapting existing knowledge did not uncover biases

Worldwide learning: Company did not have existing knowledge needed to enter market

Implications: Important to find partners with context-specific knowledge

MNC #3

Lessons

Benefits from piloting in country with no local subsidiary to create learning environment

Important to be aware of potential biases and over-reliance on traditional metrics


National responsiveness: Subsidiaries could not successfully adapt existing resources

Worldwide learning: Sharing existing knowledge could prevent success due to existing biases

Implications: Critical to find ways to overcome gaps and biases in existing knowledge base

MNC #4

Lessons

Difficult to leverage existing products, consumers, or channels in these markets

Needed new mindset about transferable capabilities and resource allocation process


Global efficiency: Relying on traditional metrics was not an effective strategy

Worldwide learning: Firm needed to unlearn as opposed to leveraging internal knowledge

Implications: Required new perspective on appropriate metrics and valuable capabilities


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based on a product introduced to Western marketsmore than 10 years before. The venture team reliedon the assumption that low-income markets weresimilar to familiar upscale markets, but a decade orso behind in their stage of development.

Our respondent also noted that, without anyexplicit consideration, they ‘plugged [the venture]into the existing metrics’, particularly the MNC’spricing formula. The result was an overpricedproduct that was too expensive for low-incomemarkets and not functionally attractive enough forwealthier customers. In addition, the venture wasunable to create effective incentives to encouragetheir current distributors to promote the product,as this new offering potentially cannibalized thedistributors’ existing, and more lucrative, productlines. As our respondent indicated, relying onexisting partners meant that the product ‘didn’tgo to the secondary cities or the more rural areas’.

The venture also relied on existing linkages withthe firm’s local manufacturers for market-specificknowledge. As a result, the entry strategy was notvery inclusive and failed to incorporate importantenvironmental conditions. The firm was unable toadjust to an environment where intellectual prop-erty was not easily protected. As our respondentexplained, ‘embracing a new business model’ wasvery difficult for the company, and there wassignificant ‘internal resistance’. The decision torely on existing partners and a strategy based on itstraditional model of market entry into an emergingeconomy resulted in the venture struggling to meetits sales goals. The MNC venture was viewed as afailure and is now considered dead, but two rivals’business models have apparently succeeded. Bothof these models utilized a larger and more diversenetwork of alliance partners. They were able togenerate significant revenues by creating a low-costmanufacturing and distribution process that didnot rely on the legal protection of intellectualproperty.

At MNC #2, the challenges of relying on theconventional mindset regarding global capabilitiesemerged as one of the respondents discussed hisrecent experience in conducting market researchon a low-income market. In collaboration with thecompany’s subsidiary in a South American country,the goal was to further analyze the potential tolaunch a new product that targeted low-incomemarkets. In a very short time it became apparent tothe respondent that the managers at the hostcountry subsidiary were as unfamiliar with thelocal context as he was. Yet, these local managers

felt, being citizens of that country, that theyunderstood low-income markets. To overcomethese biases, the respondent felt it was critical to‘surface the implicit assumptions of the local brandteam’. As he noted: ‘We have a lack of knowledgeabout base-of-the-pyramid markets. The poor arenot just survival machines.’

In his efforts to explore these differences, thismanager felt it was important to contrast theperspective of ‘impoverished markets, our view ofthe base of the pyramid’ with ‘impoverished mind-sets, [which reflects] our lack of knowledge’. Toconduct the necessary research, a third-partyorganization was hired that understood that relyingon traditional assumptions about economic devel-opment could constrain the market research pro-cess. Using more anthropologically orientedmethods to explore the unique business contextat the base of the pyramid, the resulting datacollection process focused on both local needs andlocal culture. As one of our respondents explained:‘bottom-up learnings are critical’.

During the study, this respondent found that anumber of non-profit organizations could providevaluable and relevant information that comple-mented what was learned from the market research.These organizations had developed an expertise injointly promoting local social and economic devel-opment. To move forward, the respondent indi-cated that it would be necessary to establishrelationships with non-profit organizations thatcould provide knowledge about the local context.He did note, however, that although these relation-ships would be important, the MNC would need to‘overcome a lack of transparency’ typically found inits dealings with this sector of society.

Managers at MNC #3 also recognized that theirexisting local partners did not have the necessaryknowledge and capabilities to reach the targetedlow-income market. In fact, both managers inter-viewed were not only worried about the subsidiary’slack of familiarity with base-of-the-pyramid mar-kets, but were also fearful of the negative impactthat transferring existing biases might have on thesuccess of the new venture. They therefore decidedto launch a pilot project in a country where theMNC did not currently have a local subsidiary. Thisopportunity could then be, as one respondentnoted, a ‘learning market’ where the ‘situation isnot to control’, but rather ‘keep it simple’ and‘maximize flexibility’.

These managers further explained that the stan-dard company model for international expansion


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was inappropriate for this environment. A success-ful strategy would require more than leveragingexisting internal capabilities or adapting standardentry strategies. They acknowledged the impor-tance of identifying partners with the appropriatecontext-specific knowledge, and looked to ‘accessexternal competencies where ever possible’. Thispartnership model also recognized that many ofthese potential partners were organizations with astrong social mission. This meant that the ventureneeded to incorporate social as well as economicperformance goals, an approach that expandedupon the company’s traditional metrics.

In discussing its low-income market initiatives,one of the respondents at MNC #4 noted thatresources for new ventures were typically allocatedaccording to whether the firm ‘could leverageexisting products, consumers, or channels’. Thecompany also looked for ‘something that [it] canown’. Base of the pyramid ventures, however, didnot fit with traditional assumptions about marketentry strategies. As the respondents explained,these initiatives involved a new product, targeteda new set of customers, and required a new mindsetabout distribution. Thus, the managers recognizedthat they faced difficult hurdles in generatinginternal support and the needed funding.

Rather than tackle these issues head on, one ofthe managers found that the best strategy was toacknowledge that this was a new business environ-ment. As opposed to developing an argument basedon premium brands and high margins, which thecompany ‘knows’, she felt that the most attractivemetric for this venture was penetration. However,the ‘penetration game’ was something the com-pany ‘knew nothing about’, and to get supportinvolved demonstrating that conventional hurdlerates are ‘not written in stone’.

To move forward, the respondent recognized the‘need for high level strategic support’. To build thissupport, she focused on ‘benchmarking of compe-titors’ and the fact that some of the firm’s majorglobal rivals were already pursuing these types ofmarkets using metrics that evaluated both economicand social benefits. She argued that, if the firmrelied on its traditional capabilities and mindset, itcould be missing a substantial opportunity. High-lighting the potential risk from failing to respondenabled managerial support to coalesce around thisinitiative. This created the potential to override thetraditional metrics used in the resource allocationprocess and generate more internal support for apilot venture.

In summary, then, the interviews with MNCmanagers and associated in-depth analysis of thesenew ventures pointed to the shortcomings ofexisting theory and practice in the areas of EMand global strategy. The four companies were allprofitable and considered to be well-run firms andhighly successful in top-of-the-pyramid markets.However, as highlighted in Table 2, when enteringlow-income markets, these firms found that relyingon global capabilities articulated in the transna-tional model was not sufficient and, at times, couldactually be constraining. In all four firms themanagers recognized the need for an additionalcapability. Together, these findings lead to thefollowing propositions:

Proposition 1a. Top-of-the-pyramid (high income)and base-of-the-pyramid (low-income) markets willrequire different strategies and mix of capabilities.

Proposition 1b. When entering base-of-the-pyramidmarkets, traditional capabilities in global integrationand national responsiveness might actually inhibiteffectiveness.

Proposition 1c. When entering base-of-the-pyramidmarkets, firms cannot rely on the transfer or protectionwithin firm boundaries of knowledge and resourcesdeveloped in top-of-the-pyramid markets.

Proposition 1d. When entering base-of-the-pyramidmarkets, firms will need additional capability beyondthose of global efficiency, national responsiveness andtransfer of existing knowledge, which are used success-fully in top-of-the-pyramid markets.

Learnings from archival and case analyses:strategies for the base of the pyramidIn particular, the interviews suggest how existingbiases associated with top-of-the-pyramid marketscan blind managers to the realities of doingbusiness in the base of the pyramid. Relying onexisting technology, products, partners, channels,and metrics can serve to doom such ventures tofailure. Leveraging existing knowledge and theexploitation of global efficiencies can preventsuccess as it precludes the deep listening and localknowledge generation needed to succeed in suchmarkets. National responsiveness is also notenough, especially if pre-existing solutions orbusiness models are wholly inadequate for thecontext at the base of the pyramid. Indeed, anentirely new capability appears to be necessary.


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To explore more deeply which factors contributeto successful strategies in base-of-the-pyramidmarkets, the 24 cases and the accompanyingarchival materials were analyzed. Insights fromthe MNC interviews were also drawn upon whereappropriate. The first step was to make anassessment of whether or not the various initiativeswere deemed to be successful, based on earlymarket experience and the ability to developeconomically sustainable business models. EachMBA team was asked to make an assessment oftheir case. Where possible, they relied on evalua-tions by managers of these initiatives as well as ananalysis of the archival data. Their assessments werepresented in class and discussed. In addition, eachof the authors independently reviewed all the dataand rated each initiative. We compared theseanalyses and found no discrepancies in the evalua-tions. The more successful ventures were thencontrasted with those perceived to be poor perfor-mers (see Table 3). Several importantfactors emerged as being present in successfulinitiatives, but missing in those that failed orperformed poorly. These involved identifying andleveraging strengths in the existing environmentand included collaborating with non-traditional

partners, co-inventing custom solutions, and build-ing local capacity.

Collaborating with non-traditional partners:understanding the social contextVentures facing challenging new environmentsusually need to turn to partner organizations formissing resources and expertise (Eisenhardt andSchoonhoven, 1996). Indeed, government regula-tions often require MNCs to have a local corporatepartner to ensure market access in emergingeconomies (Blodgett, 1991). When entering base-of-the-pyramid markets, however, firms may needto expand dramatically the potential field ofalliance partners. Indeed, our analysis indicatedthat successful base-of-the-pyramid strategies reliedheavily on non-traditional partners. These partnersincluded non-profit organizations and communitygroups, as well as local and even village-levelgovernments. Unsuccessful strategies, on the otherhand, relied primarily on traditional partners suchas national governments and large local companies.Typically, these more traditional partners were asfar removed, in terms of business knowledge of low-income markets, as the firms trying to launch theventure.

Table 3 Need for a new global capability: analysis of archival material, case studies, and interviews with MNC managers

Strategies of successful base-of-the-pyramid market entries Strategies of failed (or poorly performing) base-of-the-pyramid

market entries

Collaborating with non-traditional partners Collaborating with non-traditional partners

K Recognized the value of both corporate and non-corporate

partners

K Heavy reliance on expertise of local subsidiary or familiar

partners

K Proactively established relationships with non-profit and

other non-traditional partner organizations

K Limited or no contact with non-profit and other non-

traditional partner organizations

K Relied on non-corporate partners for expertise on social

infrastructure and local legitimacy

K Tended to rely on familiar or existing partners for information

about new markets and the local context

Co-inventing custom solutions Co-inventing custom solutions

K Often linked with multiple distributors, who modified

product differently before selling to final user

K Preferred to sell the product as is and tried to limit

modifications by distributors and users

K Allowed for user innovation and modification K Substantial effort to protect property rights (e.g., patents,

brand names)K Product and business model design co-evolved

K Product was developed before business model was designedK Tended to view product in terms of the functionality it

provided K Tended to view value proposition in terms of product, not

functionality

Building local capacity Building local capacity

K Recognized the value of existing local institutions K Tended to view the environment in terms of the institutions

that were missingK Provided training to local entrepreneurs and other partners

K Limited contact with local entrepreneurs and local institutionsK Often saw gaps in local infrastructure or missing services as

potential opportunities K Often saw gaps in local infrastructure as challenges or

problems that had to be overcome


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A variety of non-corporate partners providedaccess to important information on target custo-mers and the overall business environment thatwas not available in the corporate sector. This goesfar beyond the typical focus on customers andsuppliers (Andersson et al., 2002). As suggested byHart and Sharma (2004), greatly increased uncer-tainty about what knowledge is useful increases theimportance of radical transactiveness, or the abilityto identify and interact effectively with a diversityof non-traditional stakeholders. By including inputfrom civil society, local community groups, and thepublic sector, firms were better able to understandand leverage existing social strengths in thesebusiness environments. In addition, they couldbetter understand which societal concerns were, asone MNC respondent noted, ‘myths and whichwere realities’. These non-traditional partners couldprovide information on the local context, locallegitimacy, and access to needed resources (Rondi-nelli and London, 2003).

One initiative, for example, utilized non-tradi-tional partners to overcome a lack of potentialsources of external funding. The managers identi-fied a multilateral institution and an NGO aspotential partners, and developed a business planthat highlighted how a successful initiative couldhelp both these organizations achieve their socialobjectives. As a respondent noted, while it ‘takestime to build credibility and relationships in thepublic sector’, it was invaluable ‘getting to knowthe core influentials’. By getting the support ofthese organizations, the company could secureimportant access to critical financial, legitimacy,and knowledge resources.

In contrast, another firm relied primarily oneconomic metrics and capabilities developed fortop-of-the-pyramid markets. The national govern-ment was viewed primarily as an important sourceof funding for base-of-the-pyramid ventures in twodifferent countries. A pre-existing technology wasintroduced, with the governments serving as keybusiness partners. The venture struggled to createlocally acceptable product offerings as it did notdevelop relationships with local partners that couldprovide an awareness of the actual needs anddesires of base-of-the-pyramid customers. In addi-tion, in both countries the governments wereeconomically unstable, and the base-of-the-pyra-mid ventures had substantial trouble with theircash flow.

In another example, one local for-profit venturecreated a three-way partnership between the private

sector, the development sector, and the localcommunity. The partnership recognized the exist-ing social infrastructure and was designed so thatknowledge and benefits flowed between each set ofpartnerships. For example, the company identified,manufactured, and sold context-appropriate farmequipment to the development sector partner,which in turn leveraged local social capital toprovide micro-credit financing to small farmersfor the purchase of the equipment. The companyalso recognized the local need for a steady source ofalternative income, and committed itself to pur-chasing all of the farmers’ production, creating aloyal source of supply. As opposed to concentratingsolely on economic efficiencies and economic-oriented metrics, the for-profit venture was able togenerate significant growth by creating a collabora-tive model that enabled it to better understand andleverage the social context. Using this approach,the company recognized and valued the role of theother two partners, even though it was dealing withunfamiliar organizations.

In contrast, another local venture has beenunable to create needed cash flow, owing, insignificant part, to its inability to establish effectivecollaborations with non-traditional partners. Inthis case, the initiative has struggled to developan understanding of the social context, and has notgenerated mutually beneficial economic and socialincentives. As a result, the venture has not securedthe support of key partners who could providemuch needed financial and knowledge resources.

Co-inventing custom solutions: building from thebottom upIn pursuing low-income markets in developingcountries, firms must adjust to an environmentwhere social, not legal, contracts dominate (deSoto, 2000), and where accurate knowledge aboutpotential consumers is not readily available (Groshand Glewwe, 1995). Assessing context-specificinformation appears to require a more participatoryapproach in which all parties need to be willing toshare information (Chambers, 1997). This extendsfar beyond the idea of ‘national responsiveness’(adapting pre-existing solutions to local condi-tions), which pervades the existing literature onglobal strategy (Bartlett and Ghoshal, 1989).

In fact, our analysis indicated that entry into low-income markets at the base of the pyramid indeedbenefited from identifying local partners who couldactively contribute to venture conceptualization byadding local content to the product design.


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Entrepreneurship by local distributors was encour-aged by providing flexibility in how the finalproduct or service could be marketed or delivered.As one corporate respondent emphasized, their goalwas ‘building infinite flexibility into the productand, therefore, selection of third-party partners’. Incontrast, unsuccessful initiatives tended to rely oncontrolling the adaptation of existing productsand, focusing on the weaknesses in the environ-ment, they also made substantial efforts to protectproperty rights, including preventing user or dis-tributor modification.

Furthermore, in successful ventures, the emphasiswas on maximizing the functionality of the productoffering. This often included having the productand business model development co-evolve. Part-ner organizations co-designed the entry strategy,including the delivery of the product or service. Asone respondent indicated, a successful initiativerequires ‘everybody who touches it to makemoney’. Poorly performing ventures, on the otherhand, tended to view the value proposition interms of the product itself, and often completed thedevelopment process at a centralized and geogra-phically distant location (for example, at corporateR&D centers) prior to designing the businessmodel.

One successful venture, for instance, decided toforgo adopting the traditional pricing model of costplus margin. Rather, in discussions with localpartners, they identified the appropriate sellingprice first. By ‘reverse engineering’ and ‘maximiz-ing local knowledge and entrepreneurship’, as onerespondent noted, they could then jointly design aproduct and business model that provided thefunctionality required and offered profit marginsthat were acceptable for a high-volume business.

In other example a locally based MNC was unableto enter base-of-the-pyramid markets effectively,primarily because its entry strategy was based onmaking an incremental adaptation to a currentproduct. By removing some of the existing func-tionality, it was able to create a lower-cost versionof one of its mainstream products. Selling this lessexpensive version through its traditional distribu-tors did allow the firm to capture some additionalprice-sensitive customers. However, the MNC wasnot successful in reaching the vast majority of low-income customers. This low-income market wouldhave been much better served if the companyhad co-designed the product from the bottomup (as opposed to the top down) with localpartners who understood what set of functionalities

were most important to base-of-the-pyramidcustomers.

Developing local capacity: sharing resourcesacross boundariesThe transnational model, the predominant view ofglobal strategy, focuses on global integration,national responsiveness, and worldwide learning(Bartlett and Ghoshal, 1989). This perspectiveemphasizes sharing resources internally and max-imizing the economic benefits to the firm (Buckleyand Casson, 1991). However, our analysis suggeststhat firms interested in targeting base-of-the-pyr-amid markets must also consider both societalperformance and the sharing of resources outsidefirm boundaries – local capacity building – to besuccessful.

Firms entering low-income markets may facenovel challenges from NGOs and civil society. Asone respondent noted, he was worried about ‘pushback from NGOs’, including ‘demonstrations’ andclaims of ‘corporate imperialism’. Respondentsindicated that the increased attention on globalpoverty, the growing anti-globalization movement,and the threat of intra-country wars, regionalconflicts, crime, and terrorism highlighted the factthat ventures in the base of the pyramid requirestrong consideration of the social impact on localcommunities.3

One important way in which successful venturesaddressed the need to consider societal perfor-mance was by incorporating local capacity buildingdirectly in their business models (rather thanthrough the more conventional approach of corpo-rate philanthropy as an activity separate from thebusiness). For example, several successful initiativesincluded training programs for local entrepreneurs.Others identified mutually beneficial opportunitiesthat built the capacity of existing institutions, suchas micro-lending organizations, or filled in gapsin local infrastructure through providing basicservices.

The financial investment in local capacity doesnot necessarily have to be large to create substantialbenefits. For example, strategic bridging offers adifferent and potentially useful way of flexiblyadjusting the level of collaboration (Westley andVredenburg, 1991). Similar to the entrepreneurfilling a structural hole (Burt, 1992), an MNC canbecome an unofficial strategic bridge betweenexisting organizations that are having difficultycooperating with each other. By becoming astrategic bridge, the MNC becomes a conduit


14


and can enhance the flow of information,capabilities, and financial resources between theseorganizations.

In one Latin American country, for instance, alocally based MNC was able to target effectively alow-income market only after serving as a bridgebetween local distributors and base-of-the-pyramidcustomers whom these distributors were havingtrouble reaching effectively. In this case, the MNCspanned the social gaps between organizations byproviding value-added advisory services and train-ing programs that strengthened the inefficientpractices by the intermediaries, built local knowl-edge, and created surplus value for local consumers.Using an approach of identifying and developingexisting local capacity, the MNC covered the cost ofproviding the service, improved its sale of rawmaterials, enhanced inter-organizational commu-nication and trust, and generated additional repu-tational and branding opportunities.

Another MNC venture, also interested in improv-ing the local supply chain, has been unsuccessful todate, primarily because of its inability to developlocal capacity. The initiative was grounded in thefirm’s reputation for corporate social responsibility.The company’s social responsibility capabilitieswere, however, based mainly on donating resourcesto third parties. As a result, this approach did notinvolve investments by the company’s operatingunits, and was not focused on identifying andstrengthening business-critical existing institutionsin the local market environment. To date, the firmhas not been successful in capacity building in thetargeted low-income market. The supply chainremains weak, and the new initiative is yet tobridge the gaps in local capabilities necessary tocreate a successful business model.

Together, these results lead to the followingpropositions:

Proposition 2a. When entering base-of-the-pyramidmarkets, identifying and leveraging existing strengths inthe business environment can enhance effectiveness.

Proposition 2b. When entering base-of-the-pyramidmarkets, strategies that include understanding the socialcontext, building from the bottom up, and sharingresources across organizational boundaries can enhanceeffectiveness.

Implications: a new global capabilityOur findings from the interviews, case studies, andarchival material seem to provide an important

opportunity to extend the existing literatureson global strategy and EMs. Both these literaturesrely on implicit assumptions that are embedded intheir theoretical development. These assumptions,however, are challenged when MNCs enter low-income markets. Indeed, MNC advantage, and theassociated ability to overcome a liability of foreign-ness, is assumed to come from the transfer ofknowledge and resources within firm boundaries(Hymer, 1976; Buckley and Casson, 1991). Thetransnational model identifies global efficiency(leveraging knowledge and resources), nationalresponsiveness (modifying knowledge andresources), and worldwide learning (sharing knowl-edge and resources) as the crucial capabilities for asuccessful multinational firm (Bartlett andGhoshal, 1989).

In our examination of four ongoing MNCinitiatives, however, we found that these venturescould not rely solely on the traditional capabilitiesthat a global firm is thought to have. In each of thefour MNCs, capabilities in global efficiency,national responsiveness, and worldwide learningwere not sufficient and, at times, could actually beconstraining. When entering base-of-the-pyramidmarkets, successful organizations possessed anadditional capability. As highlighted by the success-ful strategies used to enter low-income markets,this capability appeared to be based on valuing andfacilitating the bottom-up co-invention, by adiversity of partners, of locally appropriate solu-tions. These solutions also involve investingresources to develop capacity beyond the protectiveboundaries of the firm.

Indeed, this fourth global capability could beconsidered ‘social embeddedness’ or the ability tocreate competitive advantage based on a deepunderstanding of and integration with the localenvironment. This capability involves the ability tocreate a web of trusted connections with a diversityof organizations and institutions, generate bottom-up development, and understand, leverage, andbuild on the existing social infrastructure. Ratherthan looking to overcome weakness in an emergingeconomy business environment, this capability isbased on the ability to craft a strategy that relies onresources and knowledge in the external environ-ment as sources of competitive advantage. Thisapproach challenges and extends the more top-down, internally oriented orientation favored inthe transnational model of leveraging and transfer-ring resources within the safe confines of the firm’sboundaries.


15


Management researchers have emphasized thatMNCs, in particular, have the ability to formpartnerships with a wide variety of organizations.For example, Hitt et al. (2000) found that local firmsin developing countries value reputation and awillingness to share expertise when selectingpartner organizations. Similarly, Frost (2001) foundthat larger parents and local subsidiaries withgreater resources are viewed as more credibleexchange partners, as they have greater opportu-nities for reciprocity. The results of this exploratorystudy suggest that this role needs to be expandedeven further if MNCs are to successfully enter thevast markets at the base of the pyramid.

MNCs must overcome cross-organizational differ-ences to convene a diversity of stakeholders andcreate relationships with non-traditional partners(London and Rondinelli, 2003). Given theirresources, reputation, and ‘convening power’,MNCs have the potential to attract the range ofpotential partners needed to succeed in thisdomain. Our results suggest that firms enteringlow-income markets in developing countries maynot be able to rely on traditional partners, familiarstructures, or preconceived notions about thepattern of economic development (Arnold andQuelch, 1998). At the base of the pyramid, MNCsmust develop relationships that enable them tobetter understand the social context of an environ-ment that is local, diverse, dynamic, complex, andunpredictable (Chambers, 1997; Dawar and Chat-topadhyay, 2002; Hart and Sharma, 2004). Andalthough large local firms can still be importantpartners, MNCs may also need to develop relation-ships with community groups, non-profit organiza-tions, and local entrepreneurs, and build thecapacity of local institutions (Sharma et al., 1994;Prahalad and Hammond, 2002). Developing rela-tionships with these organizations, however,requires greater transparency, an ability to under-stand and appreciate local societal conditions, andthe skill to recognize and deliver the socialperformance that these partners value.

Furthermore, whereas the conventional wisdomon emerging economies suggests that local partnersare the ones that must unlearn, in low-incomemarkets our study suggests that MNC subsidiariesmay be the ones with the most unlearning to do(Norberg-Hodge, 1991; Chambers, 1997; Autio et al.,2000; Dawar and Chattopadhyay, 2002). Thesemarkets are regulated by informal rules, socialcontracts, and shared use of assets (de Soto, 2000).Entry strategies may therefore require greater

inclusiveness and less reliance on protecting knowl-edge and technology, strategies that may becounterintuitive to subsidiary managers (Autioet al., 2000). This is highlighted in our study bythe benefits that organizations gained from thecapability to co-invent custom solutions with avariety of different stakeholders.

For example, maintaining flexibility in the pro-duct and the business model can allow localentrepreneurs, who are more familiar with localculture and customer needs, to innovate proac-tively (von Hippel, 1998). Similar to the idea of usercommunities and open source (MacCormack andHerman, 1999; von Hippel, 2001), the closer theinnovation efforts are to the end user, the morelikely they are to respond to user needs andincorporate desired functionality. Competitiveadvantage is therefore premised less upon theprotection of pre-existing proprietary technologyand intellectual property, and more on the devel-opment of trust, social capital, and permeableboundaries (Raymond, 1999).

This extends to the idea of capability develop-ment beyond firm boundaries. By supporting localcapacity building, MNCs can generate both eco-nomic and social benefits (Sen, 1999). To do thissuccessfully, however, firms must be able to under-stand the local context and recognize holes in thesocial structure that need to be filled (Burt, 1992).This can mean acting as a bridge to connect third-party organizations and thus reduce or eliminateinefficient practices in the value chain (Sharmaet al., 1994; Prahalad and Hammond, 2002). Inaddition, firms can also benefit from effectivelyworking with and supporting financial and otherinstitutions that facilitate value creation and entre-preneurship in emerging economies (George andPrabhu, 2000). Hence, by developing skills to createcapabilities outside of its boundaries, an MNC canleverage local social development to improve itseconomic performance, while at the same timebeginning to address emerging challenges to unfet-tered globalization (Soros, 2002; Stiglitz, 2002).

Taken together, these results suggest some impor-tant extensions to the literature on strategies forEMs and the transnational model of global cap-abilities. Firms entering low-income markets can-not rely on a strategy that is based on overcominglimitations in the business environment. Successfulventures did not assume that the local businessenvironments would become more Western inorientation over time. As a result, they did notimplement a strategy based on managing this


16


environment while waiting for the transition tooccur. Instead, successful ventures developed a deepunderstanding of the local environment, andfocused on generating bottom-up business creationbased on identifying, leveraging, and building theexisting social infrastructure (for example, socialcapital in micro-loan programs; expertise of non-corporate partners; entrepreneurship in user com-munities), a capability that we are calling socialembeddedness. Together, this leads to the followingproposition:

Proposition 3. When entering base-of-the-pyramidmarkets, firms with a capability in social embedded-ness are most likely to be successful.

Conclusions and future researchThe pursuit of low-income markets in emergingeconomies represents an important new futuredirection at the intersection of strategic manage-ment and IB research. Rumelt et al. (1994), in theirreview of the strategy discipline, identified ‘Whatdetermines the international success and failure offirms?’ as one of the five most fundamentalquestions in the field. In his review of the IBliterature, Peng (2001: 809) was even more explicit.He asserted that ‘emerging economies are likely tobecome the new battleground for IB competitionand that researchers need to pay careful attentionto the institutional context in which IB activitiestake place’. Within developing countries, however,the real promise for significant growth lies beyondreaching the wealthy elite currently being served byMNCs (Prahalad and Lieberthal, 1998). Tappinginto markets at the base of the pyramid can provideMNCs with access to a fast-growing population thatis potentially the most exciting growth opportunityof the future (Hart and Christensen, 2002).

Yet, although an increasing number of firms areexploring the economic opportunities at the base ofthe pyramid, strategies in these markets haveneither been empirically examined in the literatureon global strategy (Hout et al., 1982; Bartlett andGhoshal, 1989) nor subsidiary strategies for emer-ging economies (Hoskisson et al., 2000). This studytherefore sought to examine how MNCs and otherenterprises pursue opportunities at the base of thepyramid, and which strategies appear to be themost successful.

Our extended tracking, through interviews andarchival material, of four ongoing MNC ventureshighlighted potential limitations of the transna-

tional model of global strategy. Our in-depthanalysis of archival data and 24 original case studiesbegan to explore these limitations by identifyingimportant elements of successful low-income mar-ket strategies, including collaborating with non-traditional partners, co-inventing custom solu-tions, and building local capacity. As our resultssuggest, firms will need to develop a fourthcapability, social embeddedness, which allowsthem to understand and leverage the strengths ofthe market environment at the base of the pyramid.These findings from our qualitative empirical studyhave important implications for both theory andpractice.

At the theoretical level, successful pursuit of thistype of strategy in emerging economies appears torequire that MNCs move beyond the traditionalview of transnational success (Bartlett and Ghoshal,1989). These firms will need to integrate a fourthglobal capability when entering low-income mar-kets. Our longitudinal, in-depth exploration of fourmultinational ventures indicated that reliance oncapabilities in national responsiveness, global effi-ciency, and worldwide learning was insufficient atbest, and could in fact negatively impact onperformance. Rather than creating centrally devel-oped ‘one-size-fits-all’ global solutions, or adaptingsolutions created elsewhere to local conditions,successful pursuit of base-of-the-pyramid marketsappears to require firms to build, consolidate, andleverage learning from the ‘bottom up’. Thiscapability is also substantially different from theability to leverage worldwide learnings, whichassumes that the appropriate knowledge alreadyexists within the firm.

Furthermore, entering these huge markets at thebase of the pyramid requires a recognition thattraditional views of economic development andbusiness strategy may not apply. MNCs cannot relyon the assumption that all markets in the develop-ing world are evolving in similar manner toward amore Western-style economy, and they shouldavoid designing a strategy based on overcominglimitations in the business environment. However,as Tallman (1991: 71) indicates, even in developedcountry environments ‘yan MNE may enter a newforeign market, an innovative step, but use provenstrategies and structural forms to reduce its uncer-tainty in that market’. These approaches, and theassociated implicit assumptions, are likely to beinappropriate in the developing world, where thegap between the rich and poor is substantial andgrowing (Hammond, 1998). Instead, strategies for


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base-of-the-pyramid markets in emerging econo-mies must recognize that social contracts and socialinstitutions dominate, traditional partners maylack relevant expertise, and social performancematters. Rather than look to overcome weaknessesin the business environment, firms entering thesemarkets should craft a strategy that envisionsorganizations, institutions, and knowledge in theexternal environment as a basis for creatingcompetitive advantage.

This line of research also has important manage-rial implications. An increasing number of MNCsare exploring low-income markets. Understandingwhich types of base-of-the-pyramid market strate-gies positively impact on venture performance willallow managers to better assess whether, and how,their firms should be pursuing these opportunities.Preliminary evidence suggests that successful pur-suit of low-income markets in emerging economiesrequires MNCs to fundamentally rethink theirbusiness models. Scalability, flexibility, decentrali-zation, knowledge sharing, local sourcing, frag-mented distribution, non-traditional partners,societal performance, and local entrepreneurshipappear to be important to the success of suchbusiness ventures. This is a significant departurefrom the current received wisdom of world-scaleproduction, global supply chains, and local adapta-tion of centrally developed solutions.

Indeed, given the opportunities and challenges ofthe low-income market context, it may be neces-sary for MNC subsidiary managers to developmultiple strategies depending on which markets(top, middle, or low segments) within a countrythey are targeting. These various ‘within-country’strategies appear to require a different mix of thefour MNC capabilities (global efficiency, nationalresponsiveness, worldwide learning, and socialembeddedness). For example, exploration of low-income markets may benefit from social embedd-edness and worldwide learning. However, capabil-ities in global efficiencies and nationalresponsiveness may actually do more harmthan good, and may need to be activelydiscouraged.

Furthermore, although capabilities developed forand in top-of-the-pyramid markets do not appear totravel well to base-of-the-pyramid business envir-onments, the opposite may not be true. There hasbeen considerable debate over the challenges ofcreating disruptive innovations (Christensen,1997), and it has been suggested that the base ofthe pyramid may offer a unique opportunity to

incubate disruptive technologies (Christensen et al.,2001; Hart and Christensen, 2002). Interestingly,capabilities developed in this business environmentmay also have the opportunity to ‘move up thepyramid’ and challenge existing capabilities devel-oped in top-of-the-pyramid markets. Hence, cap-abilities and strategies developed at the base of thepyramid may provide the missing means by whichfirms can catalyze internal creative destruction(Schumpeter, 1962). In developing the structure,processes, and partnerships to encourage the devel-opment of social embeddednesses, firms can poten-tially generate the capability to break old routinesand boundaries and reinvent themselves (Schump-eter, 1934).

Firms with capabilities in social embeddedness,for instance, may be in a position to createstrategies for a more inclusive capitalism thataddresses both the growing opposition to globaliza-tion and the limitations of global resources. Busi-ness models for the base of the pyramid cannotmatch the consumptive nature of existing top-of-the-pyramid strategies (Hart, 1997). There simplyare not enough resources for the four billion peopleat the base of the pyramid to mimic ‘Western’approaches to economic development. Once suc-cessfully incubated in base-of-the-pyramid markets,it is entirely possible that these new capabilitiescould also address some of the more vexingdeveloped world environmental and social pro-blems.

For example, if distributed, environmentallysustainable energy production ventures are shownto be economically viable at the base of thepyramid, it may be only a matter of time beforethese technologies disrupt the reliance in top-of-the-pyramid markets on unreliable sources of fossilfuels, an aging energy distribution network, and aproduction method that may negatively affect theglobal environment (Hart and Christensen, 2002).In general, the capability to include more voices instrategy and product development and to profitablygenerate societal benefits could well becomeincreasingly valuable for companies looking fornew sources of competitive advantage in saturateddeveloped world markets.

As this was an exploratory study, there arelimitations to the conclusions that can be drawn.In the future, additional case studies and broaderempirical analysis would be valuable in extendingthe results of this research effort. From an academicperspective, the study of business strategies in low-income markets provides an exciting opportunity


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to explore emerging trends that are part of animportant future research direction for strategy andIB scholars (Rumelt et al., 1994). Future research inthis area could include examining how firms under-stand and create competitive advantage in unfami-liar environments, examining what strategies arevaluable for protecting core competencies when thefirm is faced with permeable and shifting boundaries,and exploring the value added by MNC corporateheadquarters in base-of-the-pyramid markets. Inaddition, scholars may want to compare MNCs andlarge domestic firms that operate in low-incomemarkets in emerging economies. When enteringbase-of-the-pyramid markets, domestic companiescould have both advantages (e.g., the liability offoreignness is potentially lower) and disadvantages(e.g., strong existing biases toward copying Westernbusiness approaches and the belief that since they arenationals of this country they ‘know’ this market) ascompared with their MNC competitors.

In sum, entry into base-of-the-pyramid marketsmay require a global capability beyond the adaptiveskills of national responsiveness and centralizedcontrol inherent in global efficiency, and a marketentry strategy that moves past a reliance onimported business models based on extractingknowledge and protecting and controlling resourceflows. The challenge is nothing less than reinvent-ing strategies for EMs to better reflect the realities ofongoing corporate efforts to enter markets at thebase of the economic pyramid.

AcknowledgementsWe are grateful for comments on an earlier versionthat was presented at the Strategic ManagementSociety Conference in November 2003, where themanuscript was awarded Best Conference Paper –Honorable Mention. We also thank the anonymousreviewers and JIBS Special Departmental Editor Joan

Enric Ricart for their insightful and instructive sugges-tions in developing this paper.

Notes1For instance, multinationals such as Procter &

Gamble, DuPont, Dow Chemical, Hewlett-Packard,Johnson & Johnson, Ford, Tetra Pak, andCoca-Cola have made financial commitmentsto join think tanks focused directly on examiningthe potential for serving the four billion people,approximately two-thirds of humanity, who constitutethis huge emerging market (for example, seehttp://www.kenan-flagler.unc.edu/KI/cse/bop.cfm).Furthermore, the World Business Council on Sustain-able Development, a coalition of 160 internationalfirms, has established a Sustainable Livelihoods Pro-gram. This project, with active involvement fromMNCs such as British Petroleum, Eskom, and Suez,explores the business case for companies interested inpursuing low-income markets (see http://www.wbcsd.org).

2The GNP is the value of all the goods and servicesproduced in an economy, including the value of thegoods and services imported, but less the goods andservices exported. PPP equates the price of a basket ofidentical traded goods and services in two countries.PPP provides a standardized comparison of real pricesbetween countries.

3The United Nations, for example, has a vision of amore sustainable and inclusive global economy. Therecent Johannesburg World Summit on SustainableDevelopment emphasized the growing importanceattached to eradicating global poverty. Similarly, theGlobal Compact was created as a voluntary interna-tional initiative that allies companies with UN agen-cies, non-governmental organizations, and variousother civil-society actors in the pursuit of socialgoals in areas of human rights, labor, and theenvironment.

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About the authorsTed London is completing his Ph.D. in strategicmanagement, and will be a post-doctoral fellow atthe University of North Carolina’s Kenan-FlaglerBusiness School, where he directs the Base of thePyramid Learning Laboratory. In addition to hisresearch on business strategies in emerging mar-kets, he has also published on cross-sector alliancesbetween corporations and non-profit organiza-tions. His managerial experience includes morethan 10 years in the private and non-profit sectorsin Asia, Africa, and the US.

Stuart L Hart is the SC Johnson Chair of Sustain-able Global Enterprise and Professor of Manage-ment at Cornell University’s Johnson School ofManagement. Previously, he was Professor of Stra-tegic Management at the University of NorthCarolina’s Kenan-Flagler Business School, wherehe founded the Center for Sustainable Enterprise.He received his Ph.D. from the University ofMichigan. His research interests center on strategyinnovation and change, particularly the strategicimplications of environmentalism and sustainabledevelopment.

Accepted by Joan Enric Ricart, Special Departmental Editor, 13 May 2004. This paper has been with the author for one revision.


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Reinventing Strategies for Emerging Markets