||Stuart L. Hart|
Samuel C. Johnson Chair in Sustainable Global Enterprise, SC Johnson Graduate School of Management, Cornell University, Ithaca, NY
||Por Ted London|
Senior Research Fellow, Director of Base of the Pyramid Initiative, The William Davidson Institute, University of Michigan
The success of initiatives targeting low-income markets is enhanced by recognizing that Western-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 overcoming weaknesses. These strategies include developing relationships with non-traditional partners, co-inventing custom solutions, and building local capacity.
Collaborating with Non-Traditional Partners
Ventures facing challenging new environments usually need to turn to partner organizations for missing resources and expertise. Indeed, government regulations often require MNCs to have a local corporate partner to ensure market access in emerging economies. When entering base of the pyramid markets, however, firms may need to expand dramatically the potential field of alliance partners. Successful base of the pyramid strategies rely heavily on non-traditional partners. These partners include non-profit organizations, community groups, as well as local, and even village-level governments. Unsuccessful strategies, on the other hand, rely primarily on traditional partners such as national governments and large local companies. Typically these more traditional partners are as far removed, in terms of business knowledge of low-income markets, as the firms trying to launch the venture.
A variety of non-corporate partners provides access to important information on target customers and the overall business environment that is not available in the corporate sector. This goes far beyond the typical focus on customers and suppliers. Greatly increased uncertainty about what knowledge is useful increases the importance of radical transactiveness, or the ability to identify and interact effectively with a diversity of non-traditional stakeholders. By including input from civil society, local community groups, and the public sector, firms can better understand which concerns are myths and which are realities. These non-traditional partners can provide information on the local context, local legitimacy, and access to needed resources.
Co-inventing Custom Solutions
In pursuing low-income markets in developing countries, firms must adjust to an environment where social, not legal, contracts dominate and accurate knowledge about potential consumers is not readily available. Assessing contextspecific information appears to require a more participatory approach in which all parties need to be willing to share information. This extends far beyond the idea of "local responsiveness" (adapting preexisting solutions to local conditions).
In fact, entry into low-income markets at the base of the pyramid benefits from local partners actively contributing to venture conceptualization by adding local content to the product design. Entrepreneurship by local distributors is encouraged by providing flexibility in how the final product or service can be marketed or delivered. As one corporate manager highlighted, their goal was "building infinite flexibility in the product and, therefore, selection of third party partners." Alternatively, unsuccessful initiatives tend to make substantial efforts to protect property rights, including preventing user or distributor modification.
Furthermore, in successful ventures, the emphasis is on maximizing the functionality of the product offering. This often includes having the product and business model development co-evolved. Partner organizations co-design the entry strategy, including the delivery of the product or service. As one manager indicated, successful initiatives require "everybody who touches it to make money." Poorly performing ventures, on the other hand, tend to view the value proposition in terms of the product itself and often complete the development process at a geographically distant location (for example, at corporate R&D centers) prior to designing the business model.
Building Local Capacity
The predominant view of global strategy focuses on global integration, local responsiveness, and worldwide learning. This perspective emphasizes sharing resources internally and maximizing the economic benefits to the firm. However, firms interested in targeting base of the pyramid markets must also consider societal performance and the sharing of resources outside of firm boundaries – local capacity building – to be successful.
Firms entering low-income markets may face novel challenges from non-governmental organizations (NGOs) and civil society. As onemanager noted, he was worried about "push back from NGOs," including "demonstrations" and claims of "corporate imperialism." The increased attention on global poverty, the growing anti-globalization movement, and the threat of intra-country wars, regional conflicts, crime, and terrorism highlight that ventures in the base of the pyramid require strong consideration of the social impact on local communities.
One important way successful ventures address the need to consider societal performance is by incorporating local capacity building directly in their business models (rather than through the more conventional approach of corporate philanthropy as an activity separate from the business). For example, several successful initiatives include training programs for local entrepreneurs. Others identify mutually beneficial opportunities that build the capacity of existing institutions, such as micro-lending organizations, or fill in gaps in local infrastructure through providing basic services. The financial investment in local capacity does not necessarily have to be large to create substantial benefits. For example, strategic bridging offers a different and potentially useful way of flexibly adjusting the level of collaboration. Similar to the entrepreneur filling a structural hole, an MNC can become an unofficial strategic bridge between organizations that are having difficulty cooperating with each other. By becoming a strategic bridge, the MNC becomes a conduit and can enhance the flow of information, capabilities, and financial resources between organizations.
Rethinking Business Models
Together, these three successful strategies demonstrate the importance of MNCs having a global capability in social embeddedness. Relying on global capabilities articulated in the transnational model is not sufficient and, at times, can actually be constraining. In particular, existing biases associated with top of the pyramid markets can blind managers to the realities of doing business at the base of the pyramid. Relying on existing technology, products, partners, channels, and metrics can lead such ventures to failure. Leveraging existing knowledge and the exploitation of global efficiencies can prevent success since these factors can impede the deep listening and local knowledge generation needed to succeed in such markets.
Local responsiveness is also not enough, especially if preexisting solutions or business models are wholly inadequate to the context at the base of the pyramid. Successful pursuit of lowincome markets in emerging economies requires MNCs to fundamentally rethink their business models: scaleability, flexibility, decentralization, local sourcing, fragmented distribution, and local entrepreneurship appear to be important to the success of such business ventures. This is a significant departure from the current received wisdom of world-scale production, global supply chains, and local adaptation of centrally developed solutions.