International Business and the bottom of Pyramid – Essay Solved

 

International Business and the bottom of Pyramid

(11918 words)

PERSPECTIVE

Reinventing strategies for emerging markets: beyond the transnational model

Abstract

With established markets becoming saturated, multinational corporations

(MNCs) have turned increasingly to emerging markets (EMs) in the developing

world. 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-growing

segment 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 strategy

in EMs may not be appropriate. How MNCs can successfully enter these lowincome

markets has not been effectively addressed in the literatures on global

and EM strategies. An exploratory analysis, involving interviews with MNC

managers, original case studies, and archival material, indicates that the

transnational model of national responsiveness, global efficiency and worldwide

learning may not be sufficient. Results suggest that 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. Together, these successful strategies suggest the importance of MNCs

developing 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-income

markets; 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 subsidiary),

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

Introduction

With developed world markets becoming increasingly saturated,

multinational corporations (MNCs) have turned to emerging

economies such as India, Indonesia, Brazil, China, and Mexico,

as key locations for future growth. In their efforts to enter these

markets of the future, most MNCs have focused on the wealthy

elite at the top of the economic pyramid, with

products and business models similar to those used

in the developed world ( 1998;

 1998). This has resulted, as

(1998) note, in MNCs

using an ‘imperialist mindset’ to sell existing

products to established upscale markets in emerging

economies.

By focusing on wealthy consumers and partner

organizations who participate in the formal economy,

however, these firms are seeing only the tip of

the proverbial iceberg. Almost completely ignored

until recently is a huge base of potential customers

whose annual purchasing power parity (PPP) is less

than $1500 per year, a market aptly termed the

bottom (or base) of the pyramid by Prahalad and

(2002). Low-income markets in emerging

economies present both tremendous opportunities

and unique challenges. There can be little doubt

that the four billion customers in these base-of-thepyramid

markets represent a vast potential

untapped market opportunity. MNCs, however,

may not be able to rely on capabilities in global

efficiency and national responsiveness to incrementally

adapt current products and extend existing

business models. Similarly, emerging economy

strategies that emphasize overcoming limitations in

the business environment may be viable only in

high-income markets that are integrated into the

global capitalist system.

In spite of these apparent challenges, however, a

growing number of MNCs are now beginning to

recognize and explore the enormous business

opportunity at the base of the economic pyramid

(1999;

2002).Firms such as Unilever and Hewlett-Packard,

for example, have made public commitments

to generate a sizeable portion of their revenues

from these markets ( 2002). Yet, while

MNCs are increasingly viewing low-income markets

in developing countries as potential sources of

future growth, there is almost no empirical research

on strategies for pursuing these opportunities. If

MNC entry into these markets challenges existing

theories on global capabilities and emerging market

(EM) strategies, this gap in research is becoming

increasingly untenable. It may be necessary to

reinvent strategies for EMs if firms are to successfully

serve the vast low-income markets at the base

of the pyramid.

In studying such situations, an exploratory

approach focused on theory building is most

appropriate (1989). This matches the

research methodology that has been used to study

MNC subsidiary initiatives (1997) and

corporate venturing (1983). A qualitative

empirical study was therefore used to examine

how MNCs as well as other enterprises are pursuing

opportunities in base of the economic pyramid

markets, and which strategies appear to be most

successful.

In presenting this study, we first outline the

unique opportunities and challenges for MNCs

associated with low-income markets in emerging

economies. We then review the international

business (IB) literature focused on global and EM

strategy, and highlight the strengths and limitations

of these theories when applied at the base of

the economic pyramid. Next, we describe the

research design and methods for the study; this is

then followed by a discussion of the results of our

analysis of interviews with MNC managers, case

studies, and archival data.We conclude by distilling

the theoretical insights that emerged from this

study and discussing the implications for researchers

and practitioners.

The base of the economic pyramid:

opportunities and challenges

The opportunities associated with low-income

markets are becoming increasingly apparent to

both scholars and managers. There is clearly more

than meets the eye when considering customers

with annual purchasing power parity (PPP) of

$1500 or less ( 2002). The vast

majority of the populations operate primarily in

the large, but hidden, informal economies that are

not recorded in official gross national product

(GNP) or PPP statistics.Across the globe, it has

been estimated that the informal sector includes

more than $9 trillion in hidden (or unregistered)

assets, an amount nearly equivalent to the total

value of all companies listed on the 20 most

developed countries’ main stock exchanges (

2000). In addition to assets, the value of

economic transactions in these markets may match

or even exceed what is recorded in the formal

economic sectors in developing countries (

1999).

In Mexico, for example, the informal economy

represented roughly 30–40% of the economic

activity in the country in the late 1980s, and has

continued to grow rapidly (2000).

Beyond the desire to hide illicit activities, the

incentives encouraging entrepreneurs to participate

in 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 world

from those in the developing world. In developed

countries the informal economy is much smaller,

and a primary objective is to evade taxes (

 1999). In the developing world, on the

other hand, it is simply too costly or complicated

for many entrepreneurs to enter the formal economy.

For example,  (2000) found that it

takes 289 days and $1231 to register a business in

Peru. As a result, in emerging economies, the

informal, or extralegal, sector plays a different and

more substantial role than what is found in the

developed world.

Concealed below the surface of the GNP and PPP

numbers, therefore, is an immense and fast-growing

economic system that includes a thriving

community of small enterprises, barter exchanges,

sustainable livelihoods activities, subsistence farming,

and unregistered assets (1997).

Furthermore, most entrepreneurs and customers

in base-of-the-pyramid markets are poorly served

by low-quality vendors or are actively exploited by

predatory suppliers and intermediaries, suggesting

the possibility of generating both profits and

consumer surplus (

2002). Clearly, serving base-of-the-pyramid customers,

who number approximately four billion

worldwide, offers tremendous opportunities. However,

they also present unique challenges to MNCs

looking for new markets.

Social contracts and social institutions dominate

Entering low-income markets in emerging economies

may require a different strategic approach.

Reaching these markets involves bridging the

formal and informal economies. In the informal

economy, relationships are grounded primarily on

social, not legal, contracts (de Soto, 2000), and the

organizations with the most expertise in serving

these markets – government and civil society – have

a strong social orientation (1994;

 1997; 1999). As  (2000)

highlights with his story about listening to the

‘barking dogs’ in low-income markets, informal

social boundaries often dominate over formal legal

documentation. In these environments, although

formally registered property ownership may not

exist, the local dogs demonstrate that boundaries

are recognized and protected. The dogs bark only

when someone passes by or crosses extralegal

boundaries recognized in the informal economy.

Clearly, boundaries exist and are respected. Successfully

operating in this business environment

requires a capability to understand and appreciate

the benefits of the existing social infrastructure

(1997).

Indeed, organizations that value and leverage

existing social capital have achieved success in

these markets. Many of the most successful microloan

programs targeting the poor, for instance, rely

on group lending and peer pressure to ensure

payback. If one person in the group defaults, no

one else in that group is eligible for a future loan.

When used in low-income markets in the developing

world, this novel design has created payback

rates that even banks in the developed world would

envy. However, when transferred to the inner city

in the US, this model has been a failure (

1996), illustrating that unique social institutions

operate in the informal economy in developing

countries.

Traditional partners may lack relevant experience

In their efforts to protect proprietary technology

and knowledge, MNCs have tended to partner with

the minority of individuals and businesses in the

developing world that participate in the formal

economy, understand the global capitalist system,

and value Western products (2000). Local

partners come from a relatively small subset of

organizations – typically large domestic firms,

government entities, or a combination of both,

such as state-owned enterprises – whose primary

business experience is centered on dealing with the

local, and mainly urban, elite.

However, economic development at the base of

the economic pyramid may not follow familiar

patterns found in the developed world (

 1998;1998). As the Nobel prize

winning economist  suggests, the

failure of the world’s global financial institutions in

their efforts to facilitate economic development

that is more inclusive demonstrates the dangers of

relying on traditional players and their limited

views of what is appropriate and effective (

2002). Non-profit organizations and other socially

oriented institutions can play an important role in

business development (

2003), especially in developing countries (

2004). Grameen Bank and Grameen

Phone, for instance, have combined commercial

and non-profit operations to successfully provide

banking and cellular services to rural areas in

Bangladesh (2000), and the nonprofit

organization the Solar Electric Light Fund,

together with for-profit partners, has been active in

Strategies for emerging markets Ted London and Stuart L Hart

3

Journal of International Business Studies

developing commercially viable electrification programs

for the rural poor in Asia (

1997).

Societal performance matters

Finally, there is increasing pressure for corporations

to take a greater role in addressing global societal

issues such as eradicating poverty and environmental

protection in developing countries. As the

literature on global sustainable development indicates,

the pressure on MNCs to create a more

inclusive capitalism is mounting (

2002). The fact that the developed world

consists of 20% of the population, yet uses 80% of

the world’s resources, however, suggests that raising

the economic condition of those in the developing

world will require a differentmodel of development

(1997).

Indeed, the World Summit on Sustainable

Development in Johannesburg, the anti-globalization

demonstrations in Davos, Prague, Seattle,

Washington, DC, and Cancun, and the increase in

intra- and cross-border tensions highlight the fact

that the growing discontent of the world’s poor can

no longer be easily ignored by global institutions

and companies (2002). Global firms and

institutions are therefore increasingly being

expected to consider the societal and environmental

impacts of their activities (2002). As

another Nobel prize winning economist emphasizes,

a crucial aspect of this effort is the development

of human capabilities that build economic

and political freedom (1999). This integrated

approach to economic development and poverty

alleviation is especially important in low-income

markets where economic, social, and environmental

considerations are so closely intertwined

( 1997;  1999; , 2001).

Firms without a capacity to appreciate and create

social value or to become locally embedded in the

social infrastructure that dominates low-income

markets may struggle to overcome their liability of

foreignness.

Gaps in existing IB theory

Over the past several decades, corporations have

gained increasing experience in expanding their

operations in foreign markets, and the literature on

EMs and global strategy has also grown. However,

most MNC investment has been targeted at developed

countries (998;

1998); these countries are also the context for most

IB research (see the excellent review by

2001). For example, most of the research on

subsidiary entrepreneurship has focused on developed

countries in North America and Europe

(1997; 2001;

2002), limiting the generalizability of this theoretical

stream to countries at the same stage of

economic development and having the same

cultural orientation toward entrepreneurship

( 1993;  2000).

EM strategy

Most research by management scholars on firm

strategies in emerging economies suffers from a

similar limitation: a pre-occupation with strategies

that seek to overcome the lack of a Western-style

business environment (2001). Even when

serving top of the pyramid customers, operating in

emerging economies is challenging as the rule of

law is often poorly enforced (

2000). MNCs accustomed to creating competitive

advantage through patents, brands, and contracts

are wary of entering markets where their proprietary

technology and knowledge cannot be protected

through enforceable legal mechanisms

(2000).

To address this uncertainty, MNCs entering these

markets look for ways to overcome limitations in

the business environment. Firms design boundaries

to protect internal resources and capabilities from

unintended spillover, and look for partner organizations

that wield substantial capability to fill voids

in the business environment ( 1988;

2001). Indeed, a wide variety

of international management scholars have

adopted the ‘Westernization’ assumption in their

research: while waiting for a more Western-style

economy to develop, they explore how MNC

managers can successfully implement strategies

that help to overcome the lack of legal boundaries

and difficulties in property rights protection. For

example, researchers have examined how firms can

address gaps in the business environment through

forming alliances (1987;  2000),

joining networks ( 2001), using

interpersonal ties (Peng and Luo, 2000), or managing

firm boundaries ( 2000).

More specifically,  (2000), in their

introduction to a special issue in the Strategic

Management Journal on emerging economies,

emphasize that developing country adaptation to

Western practices is crucial to attracting investment

by MNCs from the developed world. In discussing

foreign direct investment (FDI), the authors propose

that

The primary impediment appears to be the lack of welldefined

property rights that convey exclusivity, transferability,

and quality of titley As a result, institutional

capacity building was, and continues to be, key for

attracting inward FDI (2000: ).

This perspective assumes that over time the local

business environment will evolve into an economic

setting that is familiar to Western managers: legal

contracts will supersede social ones and competitive

advantage will be grounded in the ability to

protect resources and knowledge from unintended

leakage outside firm boundaries. In the meantime,

firm managers should develop strategies that overcome

the current weaknesses in this environment.

This view, however, relies on an implicit assumption

about EMs. As (1998: )

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 previously

in developed economies will be replicated in EMs.

MNC managers and academics must move beyond

the ‘imperialist mindset’ that everyone must want to

look and act like Westerners (

1998). While it can be argued that the

wealthiest fraction of the population in emerging

economies participates in a capitalist system that is

evolving toward a more Western-style business

environment, the vast majority of the people are

on the outside looking in ( 2000). This

suggests that, at the very least, there are two different

and important patterns of economic development

occurring in most emerging economies. In fact, the

informal economy may account for as much as 30–

60% of the total economic activity in some developing

countries ( 2000), meaning that a

substantial amount of business activity in lowincome

markets is conducted outside the official

law, with informal social contracts being used as

binding arrangements.

Global strategy

Researchers have suggested that, in pursuing topof-

the-pyramid markets in emerging economies,

MNCs can rely on proven global capabilities to

incrementally adapt existing business models and a

familiar subsidiary strategy based on controlling

resources, extracting knowledge, and leveraging

1989). Internalization, or the modifying (national

responsiveness), leveraging (global efficiency), or

sharing (worldwide learning) of existing products

or resources within firm boundaries will allow

MNCs to overcome liabilities of foreignness in

serving the wealthy top of the pyramid (

1976; , 1991).

This approach implicitly assumes that all markets

within a country are following a similar pattern of

economic development, and that MNCs using the

transnational model can effectively leverage capabilities

in global efficiency, national responsiveness,

and knowledge transfer to maximize economic

benefits in all business environments (

1989). The success of distributed energy

and micro-loan ventures, however, suggests that

small-scale, decentralized initiatives may make more

sense in low-income markets than the developed

world mantra of centralization of control and

economies of scale (2001). In

addition, boundary-protecting strategies are less

likely to be effective in low-income markets where

social benefits influence economic decisions (

2001) and where shared use of property is

common and blurs ownership boundaries (C

1997). In these EMs, MNC knowledge and

resources are unlikely to be successfully protected

through patents or brands (2002).

Although the transnational approach remains the

most influential model of global strategy (

2001), others have argued that firms operate

primarily either as global companies leveraging

economic efficiencies or as multidomestic organizations

that allow their subsidiaries to compete

independently in different countries (

1982). MNC strategy is viewed as either exploiting

economic efficiencies through economies of scale

or encouraging national responsiveness by adapting

to local conditions – or a mix of the two (

1980). Researchers, using data from MNC practices,

have explored which country-level strategy is the

best fit for a subsidiary (1989).

This view is potentially representative of effective

global strategy in top-of-the-pyramid markets, but

it ignores within-country differences in business

environments and implicitly assumes that capabilities

developed at the top of the pyramid will be

viable across all prospective markets.

In a similar manner, international marketers have

also recognized the need to consider both global

efficiencies and local adaptation in segmenting

consumer markets. The challenge is to find global

similarities that can be leveraged across multiple

countries while adapting to local differences as

needed ( 1994). Two interesting

approaches to global segmentation have been

proposed. One is to cluster countries along similar

dimensions, with firms being encouraged to concentrate

on one cluster, or subset of countries, at a

time (1994;

1998). A second strategy is to look for global

segments that transcend national and cultural

boundaries ( 1994). Although

this second approach recognizes within-country

differences, the emphasis is on segmenting top of

the pyramid customers more finely, such as the

global elite and the global teenager (

 1994). Expected behaviors in these segments

are typically modeled after Western values

and lifestyles. In both segmentation approaches the

focus is on leveraging knowledge and skills developed

in and for top-of-the-pyramid markets.

In sum, emerging economies should not be

viewed as following a homogeneous pattern of

economic development in which all markets are

evolving toward a more Western-style business

environment. Although the wealthy elite in these

countries may participate in global capitalism, the

vast majority of the population has been excluded

from this economic system. Indeed, as Dawar and

(2002) observe, it makes little sense

for MNCs to think in terms of distinct ‘country

strategies’ (e.g., China strategy) in the context of

EMs. Instead, it might be more appropriate to

develop separate strategies for wealthy, rising

middle class, and poor customers across country

markets (1999). Hence, entry

into base-of-the-pyramid markets may require a

global capability beyond the adaptive skills of

national responsiveness or the centralized control

inherent in global efficiency, and a market entry

strategy that moves past a reliance on imported

business models based on extracting knowledge

and protecting and controlling resource flows. This

creates challenges for MNCs, and, as Monsanto’s

and Unilever’s experiences illustrate, firms have

had mixed success in pursuing low-income markets

in developing countries (see Exhibit 1).

Yet, although an increasing number of firms are

exploring the economic opportunities at the base of

the pyramid, there is little in the way of theory or

research in the area of IB that provides clear

guidance on how to pursue these EMs. Indeed, it

seems apparent that there is a serious gap in the

existing literature when it comes to global capabilities

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 ( 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  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 baseof-

the-pyramid markets ( 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 (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

( 2002).

economic pyramid. This highlights an important

and increasingly untenable discontinuity between

MNC practices and academic research.

Research methods

Given the relatively new and unexplored nature of

the phenomenon – the launching of business

ventures in low-income markets in developing

countries – this study adopted an exploratory

research strategy ( 1984; 1989).

Qualitative research, rather than traditional quantitative

empirical tools, is particularly useful for

exploring implicit assumptions and examining new

relationships, abstract concepts, and operational

definitions (1991;  1996). The objective

was to conduct an analysis of firm strategies for

low-income markets in emerging economies that

would help to build theory on how companies

successfully enter these business environments and

to develop constructs that would facilitate future

hypothesis testing (1989).

The initial research questions provided guidance

for this study and helped us to identify meaningful

and relevant activities (1981). More specifically,

this included collecting data on the background

and success of each venture, strategies used

to enter low-income markets, product design and

development, knowledge transfer and sharing, the

leveraging of existing capabilities, and inter-organizational

relationships. The research was conducted

over a period of 3 years and involved

triangulation among a variety of different sources

of data including analysis of archival materials,

evaluation of both original and existing case

studies, and the conducting of formal and informal

interviews with managers at a number of MNCs

(1984).

An exploratory methodology such as this has

been recognized as being particularly useful for

researchers interesting in examining strategies in

emerging economies (2000). In

addition, qualitative research has provided critical

insights into innovation (

2001), entrepreneurship (2001), and

alliances ( 1991, 1992), as well as a variety of

other phenomena, such as social issues (

1991), organizational change (

1996), and proactive responsiveness to

environmental uncertainty (

1998).

Data collection involved several overlapping

steps (1984). Beginning in 2001, two research

assistants conducted an exhaustive search for

existing cases and other archival information on

base-of-the-pyramid market entry by multinationals,

local companies, and non-governmental

organizations (NGOs). In addition, from 2001–

2003, 24 such ventures were selected for further

in-depth analysis, which included collecting archival

material and, where possible, contacting key

informants. Written cases for each venture were

prepared by teams of MBA students as part of a

course focusing on business strategy at the base of

the pyramid conducted by the authors (see Table 1

for a list of these ventures).

These ventures were not selected randomly,

rather they were chosen because they offered a

variety of different approaches to exploring opportunities

in base-of-the-pyramid markets (

1989). Both Western and local (indigenous)

for-profit ventures were examined. In addition,

non-profit (NGO) ventures were included in the

sample, as these organizations play an important

role in facilitating income-generating initiatives in

areas where there has been limited economic

development (1997;

 2000). Finally, we selected cases to ensure

appropriate geographical and cultural diversity,

including ventures from Asia, Africa, and Latin

America.

Concurrent with the collection and analysis of

the archival materials and case studies, interviews

and discussions were held with managers at

MNCs engaged in launching business ventures

in low-income markets. Extensive discussions

were held during 2001–2003 with MNCs involved

in a business school-based think tank focused

on base-of-the-economic-pyramid markets. MNCs

involved included DuPont, Hewlett-Packard,

Ford, Procter & Gamble, Motorola, Johnson &

Johnson, Coca-Cola, Dow Chemical, Unilever,

and Nike.

In addition, four MNCs were specifically included

as part of this exploratory study. These four were

selected because they were highly active in pursuing

opportunities at the base of the pyramid in

emerging economies, and allowed the investigators

extensive access to these ventures over an extended

period of time. In addition, all four MNCs produced

products for the consumer sector, which meant

that they faced similar challenges regarding sourcing,

production, distribution and marketing.

Furthermore, the four were US-headquartered companies,

which helped control for any differences in

home country (‘national diamond’)-based competitive

advantages ( 1990).

With one MNC (MNC #1), a company with

approximately $9 billion in annual revenues,

discussions were held over a period of about 18

months, starting in mid-2001. The focus was on a

low-income market venture that the company had

launched in 1999 in a large developing country in

Asia. At a second MNC (MNC #2), a company

whose products are sold in more than 100 countries,

a series of interviews were conducted over a

period of about 12 months with two managers

actively involved in initiating base-of-the-pyramid

ventures in South America and Asia. With the third

MNC (MNC #3), which has affiliates in more than

50 countries, intensive discussions were held with

two managers over a period of several months

during 2002 as they prepared to launch a new

initiative targeting a Latin American low-income

market. At the fourth MNC (MNC #4), a Fortune 50

company that has had overseas operations for more

than 50 years, discussions with three managers

were conducted for about 2 years regarding base-ofthe-

pyramid ventures in Asia and South America.

To encourage greater disclosure of information,

we assured the respondents that confidential

information would not be attributed to specific

low-income market ventures. Where possible,

material on the organization and the venture was

collected and reviewed in advance. These interviews,

together with the case studies and other

archival material, were compared and contrasted in

an exploratory manner. Partially ordered data displays

were used to help in the data analysis and

reduction process (1984). For

example, once case studies had been developed and

coded, the different initiatives were ordered by level

of success and placed on the vertical axis. On the

horizontal axis we listed various strategies, capabilities,

and activities for these initiatives. These data

displays facilitated both within- and cross-case

analysis (1984). The emerging

results were then compared with existing

theory (1989). As we iterated back and

forth between existing theory and our findings, the

displays and our conclusions were updated and

refined (1994). The results of

this analysis are discussed below.

Results

The 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

between low-income markets in emerging economies

and top-of-the-pyramid markets involving the

wealthy and elite. In particular, the interviews with

MNC managers shed substantial light on the

limitations of the transnational model for companies

interested in exploring base-of-the-pyramid

markets, and the case studies and archival materials

revealed critical success factors for entering these

emerging, low-income markets.

Learnings from MNC interviews: limitations to the

transnational model

The interviews with MNC managers were especially

important when it came to critically evaluating the

role of global capabilities in successfully launching

new ventures targeting low-income markets in

emerging economies. They helped to clarify and

elucidate the weaknesses and shortcomings associated

with received theory in the area of global

strategy. These findings are summarized in Table 2

and discussed below.

The venture manager at MNC #1, for example,

indicated that his company’s entry into a lowincome

market failed due, in significant part, to

their misjudgment of the market environment. The

company felt that it could rely on old technology,

existing performance metrics, and minor adaptations

to its familiar distribution channels and

techniques for communicating with potential customers.

As it turned out, the venture was unable to

reach its target market effectively, as it was relying

on inappropriate assumptions about market development.

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

Findings regarding global capabilities

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

Findings regarding global capabilities

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

Findings regarding global capabilities

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

Strategies for emerging markets Ted London and Stuart L Hart

9

Journal of International Business Studies

based on a product introduced to Western markets

more than 10 years before. The venture team relied

on the assumption that low-income markets were

similar to familiar upscale markets, but a decade or

so behind in their stage of development.

Our respondent also noted that, without any

explicit consideration, they ‘plugged [the venture]

into the existing metrics’, particularly the MNC’s

pricing formula. The result was an overpriced

product that was too expensive for low-income

markets and not functionally attractive enough for

wealthier customers. In addition, the venture was

unable to create effective incentives to encourage

their current distributors to promote the product,

as this new offering potentially cannibalized the

distributors’ existing, and more lucrative, product

lines. As our respondent indicated, relying on

existing partners meant that the product ‘didn’t

go to the secondary cities or the more rural areas’.

The venture also relied on existing linkages with

the firm’s local manufacturers for market-specific

knowledge. As a result, the entry strategy was not

very inclusive and failed to incorporate important

environmental conditions. The firm was unable to

adjust to an environment where intellectual property

was not easily protected. As our respondent

explained, ‘embracing a new business model’ was

very difficult for the company, and there was

significant ‘internal resistance’. The decision to

rely on existing partners and a strategy based on its

traditional model of market entry into an emerging

economy resulted in the venture struggling to meet

its sales goals. The MNC venture was viewed as a

failure and is now considered dead, but two rivals’

business models have apparently succeeded. Both

of these models utilized a larger and more diverse

network of alliance partners. They were able to

generate significant revenues by creating a low-cost

manufacturing and distribution process that did

not rely on the legal protection of intellectual

property.

At MNC #2, the challenges of relying on the

conventional mindset regarding global capabilities

emerged as one of the respondents discussed his

recent experience in conducting market research

on a low-income market. In collaboration with the

company’s subsidiary in a South American country,

the goal was to further analyze the potential to

launch a new product that targeted low-income

markets. In a very short time it became apparent to

the respondent that the managers at the host

country subsidiary were as unfamiliar with the

local context as he was. Yet, these local managers

felt, being citizens of that country, that they

understood low-income markets. To overcome

these biases, the respondent felt it was critical to

‘surface the implicit assumptions of the local brand

team’. As he noted: ‘We have a lack of knowledge

about base-of-the-pyramid markets. The poor are

not just survival machines.’

In his efforts to explore these differences, this

manager felt it was important to contrast the

perspective of ‘impoverished markets, our view of

the base of the pyramid’ with ‘impoverished mindsets,

[which reflects] our lack of knowledge’. To

conduct the necessary research, a third-party

organization was hired that understood that relying

on traditional assumptions about economic development

could constrain the market research process.

Using more anthropologically oriented

methods to explore the unique business context

at the base of the pyramid, the resulting data

collection process focused on both local needs and

local culture. As one of our respondents explained:

‘bottom-up learnings are critical’.

During the study, this respondent found that a

number of non-profit organizations could provide

valuable and relevant information that complemented

what was learned from the market research.

These organizations had developed an expertise in

jointly promoting local social and economic development.

To move forward, the respondent indicated

that it would be necessary to establish

relationships with non-profit organizations that

could provide knowledge about the local context.

He did note, however, that although these relationships

would be important, the MNC would need to

‘overcome a lack of transparency’ typically found in

its dealings with this sector of society.

Managers at MNC #3 also recognized that their

existing local partners did not have the necessary

knowledge and capabilities to reach the targeted

low-income market. In fact, both managers interviewed

were not only worried about the subsidiary’s

lack of familiarity with base-of-the-pyramid markets,

but were also fearful of the negative impact

that transferring existing biases might have on the

success of the new venture. They therefore decided

to launch a pilot project in a country where the

MNC did not currently have a local subsidiary. This

opportunity could then be, as one respondent

noted, a ‘learning market’ where the ‘situation is

not to control’, but rather ‘keep it simple’ and

‘maximize flexibility’.

These managers further explained that the standard

company model for international expansion

Strategies for emerging markets Ted London and Stuart L Hart

was inappropriate for this environment. A successful

strategy would require more than leveraging

existing internal capabilities or adapting standard

entry strategies. They acknowledged the importance

of identifying partners with the appropriate

context-specific knowledge, and looked to ‘access

external competencies where ever possible’. This

partnership model also recognized that many of

these potential partners were organizations with a

strong social mission. This meant that the venture

needed to incorporate social as well as economic

performance goals, an approach that expanded

upon the company’s traditional metrics.

In discussing its low-income market initiatives,

one of the respondents at MNC #4 noted that

resources for new ventures were typically allocated

according to whether the firm ‘could leverage

existing products, consumers, or channels’. The

company also looked for ‘something that [it] can

own’. Base of the pyramid ventures, however, did

not fit with traditional assumptions about market

entry strategies. As the respondents explained,

these initiatives involved a new product, targeted

a new set of customers, and required a new mindset

about distribution. Thus, the managers recognized

that they faced difficult hurdles in generating

internal support and the needed funding.

Rather than tackle these issues head on, one of

the managers found that the best strategy was to

acknowledge that this was a new business environment.

As opposed to developing an argument based

on premium brands and high margins, which the

company ‘knows’, she felt that the most attractive

metric for this venture was penetration. However,

the ‘penetration game’ was something the company

‘knew nothing about’, and to get support

involved demonstrating that conventional hurdle

rates are ‘not written in stone’.

To move forward, the respondent recognized the

‘need for high level strategic support’. To build this

support, she focused on ‘benchmarking of competitors’

and the fact that some of the firm’s major

global rivals were already pursuing these types of

markets using metrics that evaluated both economic

and social benefits. She argued that, if the firm

relied on its traditional capabilities and mindset, it

could be missing a substantial opportunity. Highlighting

the potential risk from failing to respond

enabled managerial support to coalesce around this

initiative. This created the potential to override the

traditional metrics used in the resource allocation

process and generate more internal support for a

pilot venture.

In summary, then, the interviews with MNC

managers and associated in-depth analysis of these

new ventures pointed to the shortcomings of

existing theory and practice in the areas of EM

and global strategy. The four companies were all

profitable and considered to be well-run firms and

highly successful in top-of-the-pyramid markets.

However, as highlighted in Table 2, when entering

low-income markets, these firms found that relying

on global capabilities articulated in the transnational

model was not sufficient and, at times, could

actually be constraining. In all four firms the

managers recognized the need for an additional

capability. Together, these findings lead to the

following propositions:

Proposition 1a. Top-of-the-pyramid (high income)

and base-of-the-pyramid (low-income) markets will

require different strategies and mix of capabilities.

Proposition 1b. When entering base-of-the-pyramid

markets, traditional capabilities in global integration

and national responsiveness might actually inhibit

effectiveness.

Proposition 1c. When entering base-of-the-pyramid

markets, firms cannot rely on the transfer or protection

within firm boundaries of knowledge and resources

developed in top-of-the-pyramid markets.

Proposition 1d. When entering base-of-the-pyramid

markets, firms will need additional capability beyond

those of global efficiency, national responsiveness and

transfer of existing knowledge, which are used successfully

in top-of-the-pyramid markets.

Learnings from archival and case analyses:

strategies for the base of the pyramid

In particular, the interviews suggest how existing

biases associated with top-of-the-pyramid markets

can blind managers to the realities of doing

business in the base of the pyramid. Relying on

existing technology, products, partners, channels,

and metrics can serve to doom such ventures to

failure. Leveraging existing knowledge and the

exploitation of global efficiencies can prevent

success as it precludes the deep listening and local

knowledge generation needed to succeed in such

markets. National responsiveness is also not

enough, especially if pre-existing solutions or

business models are wholly inadequate for the

context at the base of the pyramid. Indeed, an

entirely new capability appears to be necessary.

To explore more deeply which factors contribute

to successful strategies in base-of-the-pyramid

markets, the 24 cases and the accompanying

archival materials were analyzed. Insights from

the MNC interviews were also drawn upon where

appropriate. The first step was to make an

assessment of whether or not the various initiatives

were deemed to be successful, based on early

market experience and the ability to develop

economically sustainable business models. Each

MBA team was asked to make an assessment of

their case. Where possible, they relied on evaluations

by managers of these initiatives as well as an

analysis of the archival data. Their assessments were

presented in class and discussed. In addition, each

of the authors independently reviewed all the data

and rated each initiative. We compared these

analyses and found no discrepancies in the evaluations.

The more successful ventures were then

contrasted with those perceived to be poor performers

(see Table 3). Several important

factors emerged as being present in successful

initiatives, but missing in those that failed or

performed poorly. These involved identifying and

leveraging strengths in the existing environment

and included collaborating with non-traditional

partners, co-inventing custom solutions, and building

local capacity.

Collaborating with non-traditional partners:

understanding the social context

Ventures facing challenging new environments

usually need to turn to partner organizations for

missing resources and expertise (Eisenhardt and

1996). Indeed, government regulations

often require MNCs to have a local corporate

partner to ensure market access in emerging

economies (1991). When entering baseof-

the-pyramid markets, however, firms may need

to expand dramatically the potential field of

alliance partners. Indeed, our analysis indicated

that successful base-of-the-pyramid strategies relied

heavily on non-traditional partners. These partners

included non-profit organizations and community

groups, as well as local and even village-level

governments. Unsuccessful strategies, on the other

hand, relied primarily on traditional partners such

as national governments and large local companies.

Typically, these more traditional partners were as

far removed, in terms of business knowledge of lowincome

markets, as the firms trying to launch the

venture.

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 nontraditional

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,

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

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

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

K Provided training to local entrepreneurs and other partners that were missing

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

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

problems that had to be overcome

A variety of non-corporate partners provided

access to important information on target customers

and the overall business environment that

was not available in the corporate sector. This goes

far beyond the typical focus on customers and

suppliers ( 2002). As suggested by

 (2004), 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 were better able to understand

and leverage existing social strengths in these

business environments. In addition, they could

better understand which societal concerns were, as

one MNC respondent noted, ‘myths and which

were realities’. These non-traditional partners could

provide information on the local context, local

legitimacy, and access to needed resources (

2003).

One initiative, for example, utilized non-traditional

partners to overcome a lack of potential

sources of external funding. The managers identified

a multilateral institution and an NGO as

potential partners, and developed a business plan

that highlighted how a successful initiative could

help both these organizations achieve their social

objectives. As a respondent noted, while it ‘takes

time to build credibility and relationships in the

public sector’, it was invaluable ‘getting to know

the core influentials’. By getting the support of

these organizations, the company could secure

important access to critical financial, legitimacy,

and knowledge resources.

In contrast, another firm relied primarily on

economic metrics and capabilities developed for

top-of-the-pyramid markets. The national government

was viewed primarily as an important source

of funding for base-of-the-pyramid ventures in two

different countries. A pre-existing technology was

introduced, with the governments serving as key

business partners. The venture struggled to create

locally acceptable product offerings as it did not

develop relationships with local partners that could

provide an awareness of the actual needs and

desires of base-of-the-pyramid customers. In addition,

in both countries the governments were

economically unstable, and the base-of-the-pyramid

ventures had substantial trouble with their

cash flow.

In another example, one local for-profit venture

created a three-way partnership between the private

sector, the development sector, and the local

community. The partnership recognized the existing

social infrastructure and was designed so that

knowledge and benefits flowed between each set of

partnerships. For example, the company identified,

manufactured, and sold context-appropriate farm

equipment to the development sector partner,

which in turn leveraged local social capital to

provide micro-credit financing to small farmers

for the purchase of the equipment. The company

also recognized the local need for a steady source of

alternative income, and committed itself to purchasing

all of the farmers’ production, creating a

loyal source of supply. As opposed to concentrating

solely on economic efficiencies and economicoriented

metrics, the for-profit venture was able to

generate significant growth by creating a collaborative

model that enabled it to better understand and

leverage the social context. Using this approach,

the company recognized and valued the role of the

other two partners, even though it was dealing with

unfamiliar organizations.

In contrast, another local venture has been

unable to create needed cash flow, owing, in

significant part, to its inability to establish effective

collaborations with non-traditional partners. In

this case, the initiative has struggled to develop

an understanding of the social context, and has not

generated mutually beneficial economic and social

incentives. As a result, the venture has not secured

the support of key partners who could provide

much needed financial and knowledge resources.

Co-inventing custom solutions: building from the

bottom up

In pursuing low-income markets in developing

countries, firms must adjust to an environment

where social, not legal, contracts dominate (

 2000), and where accurate knowledge about

potential consumers is not readily available (

1995). Assessing context-specific

information appears to require a more participatory

approach in which all parties need to be willing to

share information (1997). This extends

far beyond the idea of ‘national responsiveness’

(adapting pre-existing solutions to local conditions),

which pervades the existing literature on

global strategy (1989).

In fact, our analysis indicated that entry into lowincome

markets at the base of the pyramid indeed

benefited from identifying local partners who could

actively contribute to venture conceptualization by

adding local content to the product design.

Entrepreneurship by local distributors was encouraged

by providing flexibility in how the final

product or service could be marketed or delivered.

As one corporate respondent emphasized, their goal

was ‘building infinite flexibility into the product

and, therefore, selection of third-party partners’. In

contrast, unsuccessful initiatives tended to rely on

controlling the adaptation of existing products

and, focusing on the weaknesses in the environment,

they also made substantial efforts to protect

property rights, including preventing user or distributor

modification.

Furthermore, in successful ventures, the emphasis

was on maximizing the functionality of the product

offering. This often included having the product

and business model development co-evolve. Partner

organizations co-designed the entry strategy,

including the delivery of the product or service. As

one respondent indicated, a successful initiative

requires ‘everybody who touches it to make

money’. Poorly performing ventures, on the other

hand, tended to view the value proposition in

terms of the product itself, and often completed the

development process at a centralized and geographically

distant location (for example, at corporate

R&D centers) prior to designing the business

model.

One successful venture, for instance, decided to

forgo adopting the traditional pricing model of cost

plus margin. Rather, in discussions with local

partners, they identified the appropriate selling

price first. By ‘reverse engineering’ and ‘maximizing

local knowledge and entrepreneurship’, as one

respondent noted, they could then jointly design a

product and business model that provided the

functionality required and offered profit margins

that were acceptable for a high-volume business.

In other example a locally based MNC was unable

to enter base-of-the-pyramid markets effectively,

primarily because its entry strategy was based on

making an incremental adaptation to a current

product. By removing some of the existing functionality,

it was able to create a lower-cost version

of one of its mainstream products. Selling this less

expensive version through its traditional distributors

did allow the firm to capture some additional

price-sensitive customers. However, the MNC was

not successful in reaching the vast majority of lowincome

customers. This low-income market would

have been much better served if the company

had co-designed the product from the bottom

up (as opposed to the top down) with local

partners who understood what set of functionalities

were most important to base-of-the-pyramid

customers.

Developing local capacity: sharing resources

across boundaries

The transnational model, the predominant view of

global strategy, focuses on global integration,

national responsiveness, and worldwide learning

(1989). This perspective

emphasizes sharing resources internally and maximizing

the economic benefits to the firm (

 1991). However, our analysis suggests

that firms interested in targeting base-of-the-pyramid

markets must also consider both societal

performance and the sharing of resources outside

firm boundaries – local capacity building – to be

successful.

Firms entering low-income markets may face

novel challenges from NGOs and civil society. As

one respondent noted, he was worried about ‘push

back from NGOs’, including ‘demonstrations’ and

claims of ‘corporate imperialism’. Respondents

indicated that the increased attention on global

poverty, the growing anti-globalization movement,

and the threat of intra-country wars, regional

conflicts, crime, and terrorism highlighted the fact

that ventures in the base of the pyramid require

strong consideration of the social impact on local

communities.3

One important way in which successful ventures

addressed the need to consider societal performance

was 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

included training programs for local entrepreneurs.

Others identified mutually beneficial opportunities

that built the capacity of existing institutions, such

as micro-lending organizations, or filled 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

1991). Similar to the entrepreneur

filling a structural hole (1992), an MNC can

become an unofficial strategic bridge between

existing 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 these

organizations.

In one Latin American country, for instance, a

locally based MNC was able to target effectively a

low-income market only after serving as a bridge

between local distributors and base-of-the-pyramid

customers whom these distributors were having

trouble reaching effectively. In this case, the MNC

spanned the social gaps between organizations by

providing value-added advisory services and training

programs that strengthened the inefficient

practices by the intermediaries, built local knowledge,

and created surplus value for local consumers.

Using an approach of identifying and developing

existing local capacity, the MNC covered the cost of

providing the service, improved its sale of raw

materials, enhanced inter-organizational communication

and trust, and generated additional reputational

and branding opportunities.

Another MNC venture, also interested in improving

the local supply chain, has been unsuccessful to

date, primarily because of its inability to develop

local capacity. The initiative was grounded in the

firm’s reputation for corporate social responsibility.

The company’s social responsibility capabilities

were, however, based mainly on donating resources

to third parties. As a result, this approach did not

involve investments by the company’s operating

units, and was not focused on identifying and

strengthening business-critical existing institutions

in the local market environment. To date, the firm

has not been successful in capacity building in the

targeted low-income market. The supply chain

remains weak, and the new initiative is yet to

bridge the gaps in local capabilities necessary to

create a successful business model.

Together, these results lead to the following

propositions:

Proposition 2a. When entering base-of-the-pyramid

markets, identifying and leveraging existing strengths in

the business environment can enhance effectiveness.

Proposition 2b. When entering base-of-the-pyramid

markets, strategies that include understanding the social

context, building from the bottom up, and sharing

resources across organizational boundaries can enhance

effectiveness.

Implications: a new global capability

Our findings from the interviews, case studies, and

archival material seem to provide an important

opportunity to extend the existing literatures

on global strategy and EMs. Both these literatures

rely on implicit assumptions that are embedded in

their theoretical development. These assumptions,

however, are challenged when MNCs enter lowincome

markets. Indeed, MNC advantage, and the

associated ability to overcome a liability of foreignness,

is assumed to come from the transfer of

knowledge and resources within firm boundaries

( 1976; 1991). The

transnational model identifies global efficiency

(leveraging knowledge and resources), national

responsiveness (modifying knowledge and

resources), and worldwide learning (sharing knowledge

and resources) as the crucial capabilities for

 1989).

In our examination of four ongoing MNC

initiatives, however, we found that these ventures

could not rely solely on the traditional capabilities

that a global firm is thought to have. In each of the

four MNCs, capabilities in global efficiency,

national responsiveness, and worldwide learning

were not sufficient and, at times, could actually be

constraining. When entering base-of-the-pyramid

markets, successful organizations possessed an

additional capability. As highlighted by the successful

strategies used to enter low-income markets,

this capability appeared to be based on valuing and

facilitating the bottom-up co-invention, by a

diversity of partners, of locally appropriate solutions.

These solutions also involve investing

resources to develop capacity beyond the protective

boundaries of the firm.

Indeed, this fourth global capability could be

considered ‘social embeddedness’ or the ability to

create competitive advantage based on a deep

understanding of and integration with the local

environment. This capability involves the ability to

create a web of trusted connections with a diversity

of organizations and institutions, generate bottomup

development, and understand, leverage, and

build on the existing social infrastructure. Rather

than looking to overcome weakness in an emerging

economy business environment, this capability is

based on the ability to craft a strategy that relies on

resources and knowledge in the external environment

as sources of competitive advantage. This

approach challenges and extends the more topdown,

internally oriented orientation favored in

the transnational model of leveraging and transferring

resources within the safe confines of the firm’s

boundaries.

Management researchers have emphasized that

MNCs, in particular, have the ability to form

partnerships with a wide variety of organizations.

For example, (2000) found that local firms

in developing countries value reputation and a

willingness to share expertise when selecting

partner organizations. Similarly, (2001) found

that larger parents and local subsidiaries with

greater resources are viewed as more credible

exchange partners, as they have greater opportunities

for reciprocity. The results of this exploratory

study suggest that this role needs to be expanded

even further if MNCs are to successfully enter the

vast markets at the base of the pyramid.

MNCs must overcome cross-organizational differences

to convene a diversity of stakeholders and

create relationships with non-traditional partners

(2003). Given their

resources, reputation, and ‘convening power’,

MNCs have the potential to attract the range of

potential partners needed to succeed in this

domain. Our results suggest that firms entering

low-income markets in developing countries may

not be able to rely on traditional partners, familiar

structures, or preconceived notions about the

pattern of economic development (

1998). At the base of the pyramid, MNCs

must develop relationships that enable them to

better understand the social context of an environment

that is local, diverse, dynamic, complex, and

unpredictable ( 1997;

2002;  2004). And

although large local firms can still be important

partners, MNCs may also need to develop relationships

with community groups, non-profit organizations,

and local entrepreneurs, and build the

capacity of local institutions (1994;

 2002). Developing relationships

with these organizations, however,

requires greater transparency, an ability to understand

and appreciate local societal conditions, and

the skill to recognize and deliver the social

performance that these partners value.

Furthermore, whereas the conventional wisdom

on emerging economies suggests that local partners

are the ones that must unlearn, in low-income

markets our study suggests that MNC subsidiaries

may be the ones with the most unlearning to do

( 1991; 1997;

2000;  2002). These

markets are regulated by informal rules, social

contracts, and shared use of assets ( 2000).

Entry strategies may therefore require greater

inclusiveness and less reliance on protecting knowledge

and technology, strategies that may be

counterintuitive to subsidiary managers (

2000). This is highlighted in our study by

the benefits that organizations gained from the

capability to co-invent custom solutions with a

variety of different stakeholders.

For example, maintaining flexibility in the product

and the business model can allow local

entrepreneurs, who are more familiar with local

culture and customer needs, to innovate proactively

(1998). Similar to the idea of user

communities and open source (

1999; 2001), the closer the

innovation efforts are to the end user, the more

likely they are to respond to user needs and

incorporate desired functionality. Competitive

advantage is therefore premised less upon the

protection of pre-existing proprietary technology

and intellectual property, and more on the development

of trust, social capital, and permeable

boundaries (1999).

This extends to the idea of capability development

beyond firm boundaries. By supporting local

capacity building, MNCs can generate both economic

and social benefits ( 1999). To do this

successfully, however, firms must be able to understand

the local context and recognize holes in the

social structure that need to be filled ( 1992).

This can mean acting as a bridge to connect thirdparty

organizations and thus reduce or eliminate

inefficient practices in the value chain (

1994;  2002). In

addition, firms can also benefit from effectively

working with and supporting financial and other

institutions that facilitate value creation and entrepreneurship

in emerging economies

 2000). Hence, by developing skills to create

capabilities outside of its boundaries, an MNC can

leverage local social development to improve its

economic performance, while at the same time

beginning to address emerging challenges to unfettered

globalization (2002; 2002).

Taken together, these results suggest some important

extensions to the literature on strategies for

EMs and the transnational model of global capabilities.

Firms entering low-income markets cannot

rely on a strategy that is based on overcoming

limitations in the business environment. Successful

ventures did not assume that the local business

environments would become more Western in

orientation over time. As a result, they did not

implement a strategy based on managing this

environment while waiting for the transition to

occur. Instead, successful ventures developed a deep

understanding of the local environment, and

focused on generating bottom-up business creation

based on identifying, leveraging, and building the

existing social infrastructure (for example, social

capital in micro-loan programs; expertise of noncorporate

partners; entrepreneurship in user communities),

a capability that we are calling social

embeddedness. Together, this leads to the following

proposition:

Proposition 3. When entering base-of-the-pyramid

markets, firms with a capability in social embeddedness

are most likely to be successful.

Conclusions and future research

The pursuit of low-income markets in emerging

economies represents an important new future

direction at the intersection of strategic management

and IB research.  (1994), in their

review of the strategy discipline, identified ‘What

determines the international success and failure of

firms?’ as one of the five most fundamental

questions in the field. In his review of the IB

literature, (2001) was even more explicit.

He asserted that ‘emerging economies are likely to

become the new battleground for IB competition

and that researchers need to pay careful attention

to the institutional context in which IB activities

take place’. Within developing countries, however,

the real promise for significant growth lies beyond

reaching the wealthy elite currently being served by

MNCs (1998). Tapping

into markets at the base of the pyramid can provide

MNCs with access to a fast-growing population that

is potentially the most exciting growth opportunity

of the future (2002).

Yet, although an increasing number of firms are

exploring the economic opportunities at the base of

the pyramid, strategies in these markets have

neither been empirically examined in the literature

on global strategy ( 1982;

1989) nor subsidiary strategies for emerging

economies ( 2000). This study

therefore sought to examine how MNCs and other

enterprises pursue opportunities at the base of the

pyramid, and which strategies appear to be the

most successful.

Our extended tracking, through interviews and

archival material, of four ongoing MNC ventures

highlighted potential limitations of the transnational

model of global strategy. Our in-depth

analysis of archival data and 24 original case studies

began to explore these limitations by identifying

important elements of successful low-income market

strategies, including collaborating with nontraditional

partners, co-inventing custom solutions,

and building local capacity. As our results

suggest, firms will need to develop a fourth

capability, social embeddedness, which allows

them to understand and leverage the strengths of

the market environment at the base of the pyramid.

These findings from our qualitative empirical study

have important implications for both theory and

practice.

At the theoretical level, successful pursuit of this

type of strategy in emerging economies appears to

require that MNCs move beyond the traditional

view of transnational success (

1989). These firms will need to integrate a fourth

global capability when entering low-income markets.

Our longitudinal, in-depth exploration of four

multinational ventures indicated that reliance on

capabilities in national responsiveness, global efficiency,

and worldwide learning was insufficient at

best, and could in fact negatively impact on

performance. Rather than creating centrally developed

‘one-size-fits-all’ global solutions, or adapting

solutions created elsewhere to local conditions,

successful pursuit of base-of-the-pyramid markets

appears to require firms to build, consolidate, and

leverage learning from the ‘bottom up’. This

capability is also substantially different from the

ability to leverage worldwide learnings, which

assumes that the appropriate knowledge already

exists within the firm.

Furthermore, entering these huge markets at the

base of the pyramid requires a recognition that

traditional views of economic development and

business strategy may not apply. MNCs cannot rely

on the assumption that all markets in the developing

world are evolving in similar manner toward a

more Western-style economy, and they should

avoid designing a strategy based on overcoming

limitations in the business environment. However,

1991: 71) indicates, even in developed

country environments ‘yan MNE may enter a new

foreign market, an innovative step, but use proven

strategies and structural forms to reduce its uncertainty

in that market’. These approaches, and the

associated implicit assumptions, are likely to be

inappropriate in the developing world, where the

gap between the rich and poor is substantial and

growing (1998). Instead, strategies for

base-of-the-pyramid markets in emerging economies

must recognize that social contracts and social

institutions dominate, traditional partners may

lack relevant expertise, and social performance

matters. Rather than look to overcome weaknesses

in the business environment, firms entering these

markets should craft a strategy that envisions

organizations, institutions, and knowledge in the

external environment as a basis for creating

competitive advantage.

This line of research also has important managerial

implications. An increasing number of MNCs

are exploring low-income markets. Understanding

which types of base-of-the-pyramid market strategies

positively impact on venture performance will

allow managers to better assess whether, and how,

their firms should be pursuing these opportunities.

Preliminary evidence suggests that successful pursuit

of low-income markets in emerging economies

requires MNCs to fundamentally rethink their

business models. Scalability, flexibility, decentralization,

knowledge sharing, local sourcing, fragmented

distribution, non-traditional partners,

societal performance, 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.

Indeed, given the opportunities and challenges of

the low-income market context, it may be necessary

for MNC subsidiary managers to develop

multiple strategies depending on which markets

(top, middle, or low segments) within a country

they are targeting. These various ‘within-country’

strategies appear to require a different mix of the

four MNC capabilities (global efficiency, national

responsiveness, worldwide learning, and social

embeddedness). For example, exploration of lowincome

markets may benefit from social embeddedness

and worldwide learning. However, capabilities

in global efficiencies and national

responsiveness may actually do more harm

than good, and may need to be actively

discouraged.

Furthermore, although capabilities developed for

and in top-of-the-pyramid markets do not appear to

travel well to base-of-the-pyramid business environments,

the opposite may not be true. There has

been considerable debate over the challenges of

creating disruptive innovations (

1997), and it has been suggested that the base of

the pyramid may offer a unique opportunity to

incubate disruptive technologies (

2001;  2002). Interestingly,

capabilities developed in this business environment

may also have the opportunity to ‘move up the

pyramid’ and challenge existing capabilities developed

in top-of-the-pyramid markets. Hence, capabilities

and strategies developed at the base of the

pyramid may provide the missing means by which

firms can catalyze internal creative destruction

(1962). In developing the structure,

processes, and partnerships to encourage the development

of social embeddednesses, firms can potentially

generate the capability to break old routines

and boundaries and reinvent themselves (

1934).

Firms with capabilities in social embeddedness,

for instance, may be in a position to create

strategies for a more inclusive capitalism that

addresses both the growing opposition to globalization

and the limitations of global resources. Business

models for the base of the pyramid cannot

match the consumptive nature of existing top-ofthe-

pyramid strategies (1997). There simply

are not enough resources for the four billion people

at the base of the pyramid to mimic ‘Western’

approaches to economic development. Once successfully

incubated in base-of-the-pyramid markets,

it is entirely possible that these new capabilities

could also address some of the more vexing

developed world environmental and social problems.

For example, if distributed, environmentally

sustainable energy production ventures are shown

to be economically viable at the base of the

pyramid, it may be only a matter of time before

these technologies disrupt the reliance in top-ofthe-

pyramid markets on unreliable sources of fossil

fuels, an aging energy distribution network, and a

production method that may negatively affect the

global environment (2002).

In general, the capability to include more voices in

strategy and product development and to profitably

generate societal benefits could well become

increasingly valuable for companies looking for

new sources of competitive advantage in saturated

developed world markets.

As this was an exploratory study, there are

limitations to the conclusions that can be drawn.

In the future, additional case studies and broader

empirical analysis would be valuable in extending

the results of this research effort. From an academic

perspective, the study of business strategies in lowincome

markets provides an exciting opportunity

 scholars ( 1994). Future research in

this area could include examining how firms understand

and create competitive advantage in unfamiliar

environments, examining what strategies are

valuable for protecting core competencies when the

firmis faced with permeable and shifting boundaries,

and exploring the value added by MNC corporate

headquarters in base-of-the-pyramid markets. In

addition, scholars may want to compare MNCs and

large domestic firms that operate in low-income

markets in emerging economies. When entering

base-of-the-pyramid markets, domestic companies

could have both advantages (e.g., the liability of

foreignness is potentially lower) and disadvantages

(e.g., strong existing biases toward copying Western

business approaches and the belief that since they are

nationals of this country they ‘know’ this market) as

compared with their MNC competitors.

In sum, entry into base-of-the-pyramid markets

may require a global capability beyond the adaptive

skills of national responsiveness and centralized

control inherent in global efficiency, and a market

entry strategy that moves past a reliance on

imported business models based on extracting

knowledge and protecting and controlling resource

flows. The challenge is nothing less than reinventing

strategies for EMs to better reflect the realities of

ongoing corporate efforts to enter markets at the

base of the economic pyramid.