Reinventing Strategies for EM

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Reinventing Strategies for Emerging Markets: Beyond the Transnational ModelAuthor(s): Ted London and Stuart L. HartSource: Journal of International Business Studies, Vol. 35, No. 5 (Sep., 2004), pp. 350-370Published by: Palgrave Macmillan JournalsStable URL: http://www.jstor.org/stable/3875199

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journal f Internationalusiness tudies2004)35,350-370? 2004 PalgraveMacmillan td. Allrights eserved047-2506 $30.00www.jibs.net

PERSPECTIVE

Reinventingtrategies f o r emerging markets:b e y o n d t h e transnational m o de l

Ted London' andStuart LHart21Kenan-Flaglerusiness chool,UniversityfNorthCarolina,ChapelHill,NC, USA; johnsonSchoolof Management,CornellUniversity,Ithaca,NY,USA

Correspondence:T London, Kenan-FlaglerBusinessSchool,Universityof North Carolina,Chapel Hill,NC27599-3490, USA.Tel.: + 1 919 962 4259;Fax: +1 919 962 4266;E-mail:[email protected]

Received: 19 June2003Revised: 22 January2004Accepted: 13 May2004Online publicationdate: 19 August 2004

AbstractWith established markets becoming saturated, multinationalcorporations(MNCs)haveturned ncreasinglyo emergingmarkets EMs) n the developingworld.SuchEM trategieshave been targetedalmostexclusively t the wealthyelite at the top of the economic pyramid. Recently,however, a number ofMNCs have launched new initiatives that explore the untapped marketpotentialat the base of the economic pyramid, he largestandfastest-growingsegment of the world'spopulation. Reaching he four billionpeople in thesemarketsposesboth tremendousopportunities nd unique challenges o MNCs,as conventionalwisdom about MNCglobalcapabilities ndsubsidiary trategyin EMsmay not be appropriate.How MNCscan successfully nter these low-income marketshas not been effectivelyaddressed n the literatures n globaland EMstrategies.An exploratoryanalysis, involving interviewswith MNCmanagers, original case studies, and archivalmaterial, indicates that thetransnationalmodel of nationalresponsiveness,global efficiencyand world-wide learning may not be sufficient. Resultssuggest that the success ofinitiativestargeting low-income markets is enhanced by recognizing thatWestern-style patterns of economic development may not occur in thesebusinessenvironments.Business trategies hat relyon leveraging he strengthsof the existing market environmentoutperformthose that focus on over-coming weaknesses. These strategies include developing relationshipswithnon-traditionalpartners, co-inventing custom solutions, and building localcapacity.Together, hesesuccessful trategies uggest the importanceof MNCsdeveloping a global capability n socialembeddedness.Journalof International BusinessStudies (2004) 35, 350-370.doi: 0. I057/palgrave.jibs.8400099Keywords:global apabilities;ransnational;mergingconomiestrategy;ow-incomemarkets;aseof thepyramid

Everyonewants brands.And there are a lot morepoor people in the world thanrich people. Tobe a global business and to have a global market,you have toparticipatein all segments.- Keki Dadiseth, Director, Hindustan Lever Limited (Unilever's India sub-sidiary), discussing his company'seffortsto targetthe ruralpoor.

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


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Strategies for emerging markets Ted Londonand StuartLHart 351

elite at the top of the economic pyramid, withproducts and business models similar to those usedin the developed world (Arnold and Quelch, 1998;Prahalad and Lieberthal, 1998). This has resulted,as Prahalad and Lieberthal (1998) note, in MNCsusing an 'imperialist mindset' to sell existingproducts to established upscale markets in emer-ging economies.By focusing on wealthy consumers and partnerorganizations who participate in the formal econ-omy, however, these firms areseeing only the tip ofthe proverbial iceberg. Almost completely ignoreduntil recently is a huge base of potential customerswhose annual purchasing power parity (PPP) s lessthan $1500 per year, a market aptly termed thebottom (or base) of the pyramid by Prahalad andHart (2002). Low-income markets in emergingeconomies present both tremendous opportunitiesand unique challenges. There can be little doubtthat the four billion customers in these base-of-the-pyramid markets represent a vast potentialuntapped market opportunity. MNCs, however,may not be able to rely on capabilities in globalefficiency and national responsiveness to incre-mentally adapt current products and extend exist-ing business models. Similarly,emerging economystrategiesthat emphasize overcoming limitations inthe business environment may be viable only inhigh-income markets that are integrated into theglobal capitalist system.In spite of these apparent challenges, however, agrowing number of MNCs are now beginning torecognize and explore the enormous businessopportunity at the base of the economic pyramid(Hart and Milstein, 1999; Prahalad and Hart,2002).1 Firmssuch as Unilever and Hewlett-Packard,for example, have made public commitments togenerate a sizeable portion of their revenues fromthese markets(Ellisonet al., 2002). Yet,while MNCsare increasingly viewing low-income markets indeveloping countries as potential sources of futuregrowth, there is almost no empirical research onstrategies for pursuing these opportunities. If MNCentry into these markets challenges existing the-ories on global capabilities and emerging market(EM) strategies, this gap in research is becomingincreasingly untenable. It may be necessary toreinvent strategies for EMs if firms are to success-fully serve the vast low-income markets at the baseof the pyramid.In studying such situations, an exploratoryapproach focused on theory building is mostappropriate (Eisenhardt, 1989). This matches the

research methodology that has been used to studyMNC subsidiary initiatives (Birkinshaw,1997) andcorporate venturing (Burgelman, 1983). A qualita-tive empirical study was therefore used to examinehow MNCsas well as other enterprises arepursuingopportunities in base of the economic pyramidmarkets, and which strategies appear to be mostsuccessful.In presenting this study, we first outline theunique opportunities and challenges for MNCsassociated with low-income markets in emergingeconomies. We then review the internationalbusiness (IB) literature focused on global and EMstrategy, and highlight the strengths and limita-tions of these theories when applied at the baseof the economic pyramid. Next, we describe theresearch design and methods for the study; thisis then followed by a discussion of the results ofour analysis of interviews with MNC managers,case studies, and archivaldata. We conclude by dis-tilling the theoretical insights that emerged fromthis study and discussing the implications forresearchersand practitioners.The base of the economic pyramid:opportunities and challengesThe opportunities associated with low-incomemarkets are becoming increasingly apparent toboth scholars and managers. There is clearly morethan meets the eye when considering customerswith annual purchasing power parity (PPP) of$1500 or less (Prahaladand Hart, 2002). The vastmajority of the populations operate primarily inthe large, but hidden, informal economies that arenot recorded in official gross national product(GNP) or PPP statistics.2 Across the globe, it hasbeen estimated that the informal sector includesmore than $9 trillion in hidden (or unregistered)assets, an amount nearly equivalent to the totalvalue of all companies listed on the 20 mostdeveloped countries' main stock exchanges (deSoto, 2000: 35). In addition to assets, the valueof economic transactions in these markets maymatch or even exceed what is recorded in theformal economic sectors in developing countries(Henderson, 1999).In Mexico, for example, the informal economyrepresented roughly 30-40% of the economicactivity in the country in the late 1980s, and hascontinued to grow rapidly (de Soto, 2000: 78).Beyond the desire to hide illicit activities, theincentives encouraging entrepreneurs to participatein the informal, as opposed to the formal, economy

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Strategies for emerging markets TedLondonand StuartLHart352

are fundamentally different in the developed worldfrom those in the developing world. In developedcountries the informal economy is much smaller,and a primary objective is to evade taxes (TheEconomist, 1999). In the developing world, on theother hand, it is simply too costly or complicatedfor many entrepreneurs to enter the formal econ-omy. For example, de Soto (2000) found that ittakes 289 days and $1231 to register a businessin Peru. As a result, in emerging economies, theinformal, or extralegal, sector plays a different andmore substantial role than what is found in thedeveloped world.Concealed below the surfaceof the GNPand PPPnumbers, therefore, is an immense and fast-growing economic system that includes a thrivingcommunity of small enterprises, barter exchanges,sustainable livelihoods activities, subsistence farm-ing, and unregistered assets (Chambers, 1997).Furthermore, most entrepreneurs and customersin base-of-the-pyramid markets are poorly servedby low-quality vendors or are actively exploited bypredatory suppliers and intermediaries, suggestingthe possibility of generating both profits andconsumer surplus (Prahalad and Hammond,2002). Clearly, serving base-of-the-pyramid custo-mers, who number approximately four billionworldwide, offers tremendous opportunities. How-ever, they also present unique challenges to MNCslooking for new markets.Social contracts and social institutions dominateEntering low-income markets in emerging econo-mies may require a different strategic approach.Reaching these markets involves bridging theformal and informal economies. In the informaleconomy, relationships are grounded primarily onsocial, not legal, contracts (de Soto, 2000), and theorganizations with the most expertise in servingthese markets - government and civil society - havea strong social orientation (Aturupane et al., 1994;Chambers, 1997; Sen, 1999). As de Soto (2000: 163)highlights with his story about listening to the'barking dogs' in low-income markets, informalsocial boundaries often dominate over formal legaldocumentation. In these environments, althoughformally registered property ownership may notexist, the local dogs demonstrate that boundariesare recognized and protected. The dogs bark onlywhen someone passes by or crosses extralegalboundaries recognized in the informal economy.Clearly, boundaries exist and are respected. Success-fully operating in this business environment

requires a capability to understand and appreciatethe benefits of the existing social infrastructure(Chambers, 1997).Indeed, organizations that value and leverageexisting social capital have achieved success inthese markets. Many of the most successful micro-loan programstargeting the poor, for instance, relyon group lending and peer pressure to ensurepayback. If one person in the group defaults, noone else in that group is eligible for a future loan.When used in low-income markets in the develop-ing world, this novel design has created paybackrates that even banks in the developed worldwould envy. However, when transferred to theinner city in the US, this model has been a failure(Buntin et al., 1996), illustrating that unique socialinstitutions operate in the informal economy indeveloping countries.Traditional partners may lack relevant experienceIn their efforts to protect proprietary technologyand knowledge, MNCs have tended to partnerwiththe minority of individuals and businesses in thedeveloping world that participate in the formaleconomy, understand the global capitalist system,and value Western products (de Soto, 2000). Localpartners come from a relatively small subset oforganizations - typically large domestic firms,government entities, or a combination of both,such as state-owned enterprises - whose primarybusiness experience is centered on dealing with thelocal, and mainly urban, elite.However, economic development at the base ofthe economic pyramid may not follow familiarpatterns found in the developed world (Arnold andQuelch, 1998; Hammond, 1998). Asthe Nobel prizewinning economist Joseph Stiglitz suggests, thefailure of the world's global financial institutions intheir efforts to facilitate economic developmentthat is more inclusive demonstrates the dangers ofrelying on traditional players and their limitedviews of what is appropriateand effective (Stiglitz,2002). Non-profit organizations and other sociallyoriented institutions can play an important role inbusiness development (Rondinelli and London,2003), especially in developing countries (Hartand Sharma, 2004). Grameen Bank and GrameenPhone, for instance, have combined commercialand non-profit operations to successfully providebanking and cellular services to rural areas inBangladesh (Richardson et al., 2000), and the non-profit organization the Solar Electric Light Fund,together with for-profit partners, has been active in



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developing commercially viable electrification pro-grams for the ruralpoor in Asia (Sonenshein et al.,1997).Societal performance mattersFinally,there is increasing pressurefor corporationsto take a greater role in addressing global societalissues such as eradicating poverty and environ-mental protection in developing countries. As theliterature on global sustainable developmentindicates, the pressure on MNCs to create amore inclusive capitalism is mounting (Hart andChristensen, 2002). The fact that the developedworld consists of 20% of the population, yet uses80% of the world's resources, however, suggeststhat raising the economic condition of those in thedeveloping world will require a different model ofdevelopment (Hart, 1997).Indeed, the World Summit on SustainableDevelopment in Johannesburg, the anti-globaliza-tion demonstrations in Davos, Prague, Seattle,Washington, DC, and Cancun, and the increase inintra- and cross-bordertensions highlight the factthat the growing discontent of the world'spoor canno longer be easily ignored by global institutionsand companies (Stiglitz, 2002). Global firms andinstitutions are therefore increasingly beingexpected to consider the societal and environ-mental impacts of their activities (Soros, 2002). Asanother Nobel prize winning economist empha-sizes, a crucial aspect of this effort is the develop-ment of human capabilities that build economicand political freedom (Sen, 1999). This integratedapproach to economic development and povertyalleviation is especially important in low-incomemarkets where economic, social, and environ-mental considerations are so closely intertwined(Chambers, 1997; Sen, 1999; World Bank, 2001).Firms without a capacity to appreciate and createsocial value or to become locally embedded in thesocial infrastructure that dominates low-incomemarketsmay struggle to overcome their liability offoreignness.Caps in existing IB theoryOver the past several decades, corporations havegained increasing experience in expanding theiroperations in foreign markets, and the literature onEMs and global strategy has also grown. However,most MNC investment has been targeted at devel-oped countries (Arnold and Quelch, 1998; Sachs,1998); these countries are also the context for mostIB research (see the excellent review by Tallman,

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

EMstrategyMost research by management scholars on firmstrategies in emerging economies suffers from asimilar limitation: a pre-occupation with strategiesthat seek to overcome the lack of a Western-stylebusiness environment (Peng, 2001). Even whenserving top of the pyramid customers, operating inemerging economies is challenging as the rule oflaw is often poorly enforced (Hoskisson et al.,2000). MNCs accustomed to creating competitiveadvantage through patents, brands, and contractsare wary of entering markets where their proprie-tary technology and knowledge cannot be pro-tected through enforceable legal mechanisms(Delios and Henisz, 2000).To addressthis uncertainty, MNCs entering thesemarkets look for ways to overcome limitations inthe business environment. Firmsdesign boundariesto protect internal resources and capabilities fromunintended spillover, and look for partner organi-zations that wield substantial capability to fill voidsin the business environment (Dunning, 1988;Khanna and Rivkin, 2001). Indeed, a wide varietyof international management scholars haveadopted the 'Westernization' assumption in theirresearch: while waiting for a more Western-styleeconomy to develop, they explore how MNCmanagers can successfully implement strategiesthat help to overcome the lack of legal boundariesand difficulties in property rights protection. Forexample, researchershave examined how firms canaddress gaps in the business environment throughforming alliances (Beamish, 1987; Hitt et al., 2000),joining networks (Khanna and Rivkin, 2001), usinginterpersonal ties (Peng and Luo, 2000), or mana-ging firm boundaries (Delios and Henisz, 2000).More specifically, Hoskisson et al. (2000), in theirintroduction to a special issue in the StrategicManagement Journal on emerging economies,emphasize that developing country adaptation toWestern practices is crucial to attracting investmentby MNCs from the developed world. In discussing



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foreign direct investment (FDI), the authors pro-pose thatThe primary impediment appearsto be the lack of well-defined property rights that convey exclusivity, transfer-ability, and quality of title... As a result, institutionalcapacity building was, and continues to be, key forattractinginward FDI(Hoskissonet al., 2000: 252).This perspective assumes that over time the localbusiness environment will evolve into an economic

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

In particular,our field researchsuggests that MNCs oftenerroneously adopt a 'less developed countries' mindset,assumingthat these marketsareat an early stageof the samedevelopment path followed by the advanced or developedcountries.., and that market evolution patterns seen pre-viously in developedeconomies will be replicated n EMs.MNCmanagersand academicsmust move beyondthe 'imperialist mindset' that everyone mustwant to look and act like Westerners(PrahaladandLieberthal, 1998). While it can be argued that thewealthiest fraction of the population in emergingeconomies participatesin a capitalist system that isevolving toward a more Western-style businessenvironment, the vast majority of the people areon the outside looking in (de Soto, 2000). Thissuggeststhat, at the very least, there aretwo differentand important patterns of economic developmentoccurring in most emerging economies. In fact, theinformal economy may account for as much as30-60% of the total economic activity in somedeveloping countries (de Soto, 2000), meaning that asubstantial amount of business activity in low-income markets is conducted outside the official

law, with informal social contracts being used asbinding arrangements.Global strategyResearchers have suggested that, in pursuing top-of-the-pyramid markets in emerging economies,MNCs can rely on proven global capabilities toincrementally adapt existing business models and afamiliar subsidiary strategy based on controllingresources, extracting knowledge, and leveraging

economies of scale and scope (Bartlettand Ghoshal,1989). Internalization, or the modifying (nationalresponsiveness), leveraging (global efficiency), orsharing (worldwide learning) of existing productsor resources within firm boundaries will allowMNCs to overcome liabilities of foreignness inserving the wealthy top of the pyramid (Hymer,1976; Buckley and Casson, 1991).This approach implicitly assumes that all marketswithin a country are following a similar pattern ofeconomic development, and that MNCs using thetransnationalmodel can effectively leveragecapabil-ities in global efficiency, national responsiveness,and knowledge transfer to maximize economicbenefits in all business environments (BartlettandGhoshal, 1989). The success of distributed energyand micro-loan ventures, however, suggests thatsmall-scale,decentralized nitiatives may make moresense in low-income markets than the developedworld mantra of centralization of control andeconomies of scale (Christensenetal., 2001). In addi-tion, boundary-protecting strategies are less likelyto be effective in low-income marketswhere socialbenefits influence economic decisions (Kennedy,2001) and where shareduse of propertyis commonand blurs ownership boundaries (Chambers, 1997).In these EMs, MNC knowledge and resources areunlikely to be successfullyprotectedthrough patentsor brands (McDonaldet al., 2002).Although the transnational approachremains themost influential model of global strategy (Tallman,2001), others have argued that firms operateprimarily either as global companies leveragingeconomic efficiencies or as multidomestic organi-zations that allow their subsidiaries to competeindependently in different countries (Hout et al.,1982). MNC strategy is viewed as either exploitingeconomic efficiencies through economies of scaleor encouraging national responsiveness by adapt-ing to local conditions - or a mix of the two (Doz,1980). Researchers,using data from MNC practices,have explored which country-level strategy is thebest fit for a subsidiary(Ghoshal and Nohria, 1989).This view is potentially representative of effectiveglobal strategy in top-of-the-pyramid markets, butit ignores within-country differences in businessenvironments and implicitly assumes that capabil-ities developed at the top of the pyramid will beviable across all prospective markets.In a similar manner, international marketers havealso recognized the need to consider both globalefficiencies and local adaptation in segmentingconsumer markets. The challenge is to find global

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similarities that can be leveraged across multiplecountries while adapting to local differences asneeded (Hassanand Kaynak,1994). Twointerestingapproaches to global segmentation have beenproposed. One is to cluster countries along similardimensions, with firms being encouraged to con-centrate on one cluster, or subset of countries, ata time (Moskowitz and Rabino, 1994; Oyewole,1998). A second strategy is to look for globalsegments that transcend national and culturalboundaries (Hassan and Katsanis, 1994). Althoughthis second approach recognizes within-countrydifferences, the emphasis is on segmenting top ofthe pyramid customers more finely, such as theglobal elite and the global teenager (Hassan andKatsanis, 1994). Expected behaviors in these seg-'ments are typically modeled after Western valuesand lifestyles. In both segmentation approachesthe focus is on leveraging knowledge and skillsdeveloped in and for top-of-the-pyramid markets.In sum, emerging economies should not beviewed as following a homogeneous pattern ofeconomic development in which all markets areevolving toward a more Western-style businessenvironment. Although the wealthy elite in thesecountries may participate in global capitalism, thevast majority of the population has been excluded

from this economic system. Indeed, as Dawar andChattopadhyay (2002) observe, it makes little sensefor MNCs to think in terms of distinct 'countrystrategies' (e.g., China strategy) in the context ofEMs. Instead, it might be more appropriate todevelop separate strategies for wealthy, risingmiddle class, and poor customers across countrymarkets (Hart and Milstein, 1999). Hence, entryinto base-of-the-pyramid markets may require aglobal capability beyond the adaptive skills ofnational responsiveness or the centralized controlinherent in global efficiency, and a market entrystrategy that moves past a reliance on importedbusiness models based on extracting knowledgeand protecting and controlling resourceflows. Thiscreates challenges for MNCs, and, as Monsanto'sand Unilever's experiences illustrate, firms havehad mixed success in pursuing low-income marketsin developing countries (see Exhibit 1).Yet, although an increasing number of firms areexploring the economic opportunities at the base ofthe pyramid, there is little in the way of theory orresearch in the area of IB that provides clearguidance on how to pursue these EMs. Indeed, itseems apparent that there is a serious gap in theexisting literaturewhen it comes to global capabil-ities and business strategy at the base of the

Exhibit1 Monsanto and Unileverat the base of the pyramid: wo corporateexamplesMonsanto:unsuccessfulat the base of the pyramidInthe mid-1990s Monsanto launched an effort to transform tself into a life science company with a strong focus on agriculturalbiotechnology (Simanisand Hart,2001). Emphasizinggenetic engineering, Monsanto tried to reinvent the agricultural ndustry.As part of this effort, Monsanto saw an opportunity to use genetically modified organisms (GMOs)to addressthe food andnutrition needs in low-income marketsin the developing world.Targetinglocal farmers n emerging economies provideda potential avenue for growth while simultaneously cultivatinggood publicrelations.WhatMonsantofailedto realize,however,was that low-income farmers nemerging economies typically relyon usingsavedseed for the next planting season. Asa result,Monsanto'sstrategy to use sterilizedseeds to prevent piratingof the firm'sintellectualproperty upset both these farmersand NGOactivists.Indeed, this technology was viewed as an affrontto cultural raditionsin manyemerging economies. This,combined with well-publicizedconcerns about GMOs n Europe,created a backlashagainst the company.The arroganceof this approachwas later noted by CEORobertShapiro n a speech in October 1999. However, by then it was too late,and support for Monsanto's genetically modified seeds had collapsed.Unilever: uccessfulat the base of the pyramidIncontrast, Unilever's ndiansubsidiary,HindustanLeverLimited HLL),has been extremelysuccessfulwith its strategyto serve base-of-the-pyramidmarkets Ellisonet al., 2002). HLL ses a wide varietyof partners o distribute ts products,and also supportsthe effortsof these partners o buildadditionalcapabilities.Forexample, HLL rovidedopportunitiesand trainingto localentrepreneurs,and wasnot afraidto experiment with new types of distribution,such as selling via local performersand village street theaters (Balu,2001).Inaddition, managerswere also aware that existing biases about the process of local economic development could be constraints asthe firmentered new low-income markets.They therefore requirednew employees to spend 6 weeks living in these markets,andactivelysought local consumer insights and preferencesas they developed new products. By encouraging a creative and flexiblemarketentry process, HLL as been able to generate over $1 billion in revenues from operating in low-income markets n Indiaalone(Ellisonet al., 2002).

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economic pyramid. This highlights an importantand increasingly untenable discontinuity betweenMNC practices and academic research.Research methodsGiven the relatively new and unexplored natureof the phenomenon - the launching of businessventures in low-income markets in developingcountries - this study adopted an exploratoryresearch strategy (Yin, 1984; Eisenhardt, 1989).Qualitative research, rather than traditional quan-titative empirical tools, is particularly useful forexploring implicit assumptions and examining newrelationships, abstract concepts, and operationaldefinitions (Bettis, 1991; Weick, 1996). The objec-tive was to conduct an analysis of firm strategiesforlow-income markets in emerging economies thatwould help to build theory on how companiessuccessfully enter these business environments andto develop constructs that would facilitate futurehypothesis testing (Eisenhardt, 1989).The initial research questions provided guidancefor this study and helped us to identify meaningfuland relevant activities (Yin, 1981). More specifi-cally, this included collecting data on the back-ground and success of each venture, strategiesusedto enter low-income markets, product design anddevelopment, knowledge transfer and sharing,the leveraging of existing capabilities, and inter-organizational relationships. The research wasconducted over a period of 3 years and involvedtriangulation among a variety of different sourcesof data including analysis of archival materials,evaluation of both original and existing casestudies, and the conducting of formal and informalinterviews with managers at a number of MNCs(Yin, 1984).An exploratory methodology such as this hasbeen recognized as being particularly useful forresearchers interesting in examining strategies inemerging economies (Hoskisson et al., 2000). Inaddition, qualitative research has provided criticalinsights into innovation (Galunic and Eisenhardt,2001), entrepreneurship (Miner et al., 2001), andalliances (Larson, 1991, 1992), as well as a varietyof other phenomena, such as social issues (Duttonand Dukerich, 1991), organizational change (Smithand Zeithaml, 1996), and proactive responsivenessto environmental uncertainty (Sharma andVredenburg, 1998).Data collection involved several overlappingsteps (Yin, 1984). Beginning in 2001, two researchassistants conducted an exhaustive search for

existing cases and other archival information onbase-of-the-pyramid market entry by multina-tionals, local companies, and non-governmentalorganizations (NGOs). In addition, from2001-2003, 24 such ventures were selected forfurther in-depth analysis, which included collect-ing archival material and, where possible, contact-ing key informants. Written cases for each venturewere preparedby teams of MBAstudents as partof acourse focusing on business strategy at the base ofthe pyramid conducted by the authors (see Table 1for a list of these ventures).These ventures were not selected randomly,rather they were chosen because they offered avariety of different approaches to exploring oppor-tunities in base-of-the-pyramid markets (Eisen-hardt, 1989). Both Western and local (indigenous)for-profit ventures were examined. In addition,non-profit (NGO) ventures were included in thesample, as these organizations play an importantrole in facilitating income-generating initiatives inareas where there has been limited economicdevelopment (Sonenshein et al., 1997; Richardsonet al., 2000). Finally, we selected cases to ensureappropriate geographical and cultural diversity,including ventures from Asia, Africa, and LatinAmerica.Concurrent with the collection and analysis ofthe archival materials and case studies, interviewsand discussions were held with managers atMNCs engaged in launching business venturesin low-income markets. Extensive discussionswere held during 2001-2003 with MNCs involvedin a business school-based think tank focusedon base-of-the-economic-pyramid markets. MNCsinvolved included DuPont, Hewlett-Packard,Ford, Procter & Gamble, Motorola, Johnson &Johnson, Coca-Cola, Dow Chemical, Unilever,and Nike.In addition, four MNCswere specifically includedas part of this exploratory study. These four wereselected because they were highly active in pursu-ing opportunities at the base of the pyramid inemerging economies, and allowed the investigatorsextensive access to these ventures over an extendedperiod of time. In addition, all four MNCs producedproducts for the consumer sector, which meantthat they faced similar challenges regarding sour-cing, production, distribution and marketing.Furthermore, the four were US-headquartered com-panies, which helped control for any differencesin home country ('national diamond')-based com-petitive advantages (Porter, 1990).



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Table 1 Backgroundnformationon 24 originalcase studiesOrganizationname Typeof Westernor local Region Successfulor unsuccessfulorganization organization in reachingbase of the pyramidAhold (SustainableAssistance) Forprofit Western Africa UnsuccessfulAlpina Forprofit Local Americas UnsuccessfulAmaZoncoop Not for profit Local Americas UnsuccessfulAmazon Life Treetap) Forprofit Local Americas SuccessfulCemex (PatrimonioHoy) Forprofit Local Americas SuccessfulCMPC Forprofit Local Americas UnsuccessfulDFCULeasing Forprofit Local Africa UnsuccessfulFreeplayEnergyGroup Forprofit Local Africa/Asia UnsuccessfulHand Made in America Not for profit Western Americas SuccessfulHoney Care Forprofit Local Africa SuccessfulHydraform ForProfit Local Africa SuccessfulIndigenous Designs For Profit Western Americas/Asia UnsuccessfulKenyaCeramicJiko Not for profit Local Africa SuccessfulN-Logue Forprofit Local Asia SuccessfulPEOPLink Not for profit Western Americas UnsuccessfulPot-in-PotRefrigeration Not for profit Local Africa SuccessfulProtela Forprofit Local Americas UnsuccessfulSeawaterFarms Forprofit Western Africa UnsuccessfulSELCO Forprofit Western Asia SuccessfulTARAHaat Not for profit Local Asia SuccessfulTiviskiDairy Forprofit Local Africa SuccessfulUtz KapehFoundation Not for profit Western Americas UnsuccessfulWorldSpace Forprofit Western Africa/Asia UnsuccessfulWorldWaterCorporation Forprofit Western Asia/Africa Unsuccessful

With one MNC (MNC #1), a company withapproximately $9 billion in annual revenues,discussions were held over a period of about 18months, starting in mid-2001. The focus was on alow-income market venture that the company hadlaunched in 1999 in a large developing country inAsia. At a second MNC (MNC #2), a companywhose products are sold in more than 100 coun-tries, a series of interviews were conducted over aperiod of about 12 months with two managersactively involved in initiating base-of-the-pyramidventures in South Americaand Asia.With the thirdMNC (MNC #3), which has affiliates in more than50 countries, intensive discussions were held withtwo managers over a period of several monthsduring 2002 as they prepared to launch a newinitiative targeting a Latin American low-incomemarket. At the fourth MNC (MNC#4), a Fortune 50company that has had overseasoperations for morethan 50 years, discussions with three managerswere conducted for about 2 yearsregardingbase-of-the-pyramid ventures in Asia and South America.To encourage greater disclosure of information,we assured the respondents that confidentialinformation would not be attributed to specific

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



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Strategies for emerging markets Ted Londonand StuartL Hart358

between low-income markets in emerging econo-mies and top-of-the-pyramid markets involvingthe wealthy and elite. In particular,the interviewswith MNC managers shed substantial light on thelimitations of the transnational model for com-panies interested in exploring base-of-the-pyramidmarkets,and the case studies and archivalmaterialsrevealed critical success factors for entering theseemerging, low-income markets.Learnings from MNC interviews: limitations tothe transnational modelThe interviews with MNC managerswere especiallyimportant when it came to critically evaluating therole of global capabilities in successfully launchingnew ventures targeting low-income markets inemerging economies. They helped to clarify and

elucidate the weaknesses and shortcomings asso-ciated with received theory in the area of globalstrategy.These findings are summarized in Table 2and discussed below.The venture manager at MNC #1, for example,indicated that his company's entry into a low-income market failed due, in significant part, totheir misjudgment of the marketenvironment. Thecompany felt that it could rely on old technology,existing performance metrics, and minor adapta-tions to its familiar distribution channels and

techniques for communicating with potential cus-tomers. As it turned out, the venture was unable toreach its target market effectively, as it was relyingon inappropriate assumptions about market devel-opment. Although they levered their expertise by'leading with the product', the technology used was

Table 2 Limitations f the transnationalmodel: analysisof interviewswith MNCmanagersMNC#1Lessons

Transferring xisting metricsand relyingon existing relationshipsdid not workRelyingon existing product development knowledge restrictedthe design processFindingsregarding global capabilitiesGlobalefficiency:Leveragingexisting knowledge was not an effective strategyNationalresponsiveness:Adapting existing resources to local environment did not workImplications:Inability o understand local context doomed ventureMNC #2LessonsLocalsubsidiarydid not understandlow-income marketcontextMoving forwardrequiredsurfacingbiases at the subsidiary evelFindingsregarding global capabilitiesNational responsiveness:Adapting existing knowledge did not uncover biasesWorldwidelearning:Company did not have existing knowledge needed to enter marketImplications: mportantto find partnerswith context-specific knowledgeMNC#3LessonsBenefitsfrom piloting in countrywith no local subsidiary o create learningenvironmentImportantto be aware of potential biases and over-relianceon traditional metricsFindingsregardingglobal capabilitiesNational responsiveness: ubsidiariescould not successfullyadapt existing resourcesWorldwidelearning:Sharingexisting knowledge could prevent success due to existing biasesImplications:Critical o find ways to overcome gaps and biases in existing knowledge baseMNC#4LessonsDifficult o leverage existing products, consumers, or channels in these marketsNeeded new mindset about transferablecapabilitiesand resource allocation processFindingsregardingglobal capabilitiesGlobalefficiency:Relyingon traditionalmetrics was not an effective strategyWorldwidelearning:Firmneeded to unlearnas opposed to leveraging internalknowledgeImplications:Requirednew perspectiveon appropriatemetrics and valuable capabilities

journalof InternationalusinessStudies


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based on a product introduced to Western marketsmore than 10 years before. The venture team reliedon the assumption that low-income markets weresimilar to familiarupscale markets,but a decade orso behind in their stage of development.Our respondent also noted that, without anyexplicit consideration, they 'plugged [the venture]into the existing metrics', particularly the MNC'spricing formula. The result was an overpricedproduct that was too expensive for low-incomemarketsand not functionally attractive enough forwealthier customers. In addition, the venture wasunable to create effective incentives to encouragetheir current distributors to promote the product,as this new offering potentially cannibalized thedistributors' existing, and more lucrative, productlines. As our respondent indicated, relying onexisting partners meant that the product 'didn'tgo to the secondary cities or the more rural areas'.The venture also relied on existing linkages withthe firm's local manufacturers for market-specificknowledge. As a result, the entry strategy was notvery inclusive and failed to incorporate importantenvironmental conditions. The firm was unable toadjust to an environment where intellectual prop-erty was not easily protected. As our respondentexplained, 'embracing a new business model' wasvery difficult for the company, and there wassignificant 'internal resistance'. The decision torely on existing partnersand a strategybased on itstraditional model of marketentry into an emergingeconomy resulted in the venture struggling to meetits sales goals. The MNC venture was viewed as afailure and is now considered dead, but two rivals'business models have apparently succeeded. Bothof these models utilized a larger and more diversenetwork of alliance partners. They were able togenerate significant revenues by creating a low-costmanufacturing and distribution process that didnot rely on the legal protection of intellectualproperty.At MNC #2, the challenges of relying on theconventional mindset regarding global capabilitiesemerged as one of the respondents discussed hisrecent experience in conducting market researchon a low-income market. In collaboration with thecompany's subsidiary in a South American country,the goal was to further analyze the potential tolaunch a new product that targeted low-incomemarkets. In a very short time it became apparent tothe respondent that the managers at the hostcountry subsidiary were as unfamiliar with thelocal context as he was. Yet, these local managers

felt, being citizens of that country, that theyunderstood low-income markets. To overcomethese biases, the respondent felt it was critical to'surfacethe implicit assumptions of the local brandteam'. As he noted: 'We have a lack of knowledgeabout base-of-the-pyramid markets. The poor arenot just survival machines.'In his efforts to explore these differences, thismanager felt it was important to contrast theperspective of 'impoverished markets, our view ofthe base of the pyramid' with 'impoverished mind-sets, [which reflects] our lack of knowledge'. Toconduct the necessary research, a third-partyorganization was hired that understood that relyingon traditional assumptions about economic devel-opment could constrain the market researchprocess. Using more anthropologically orientedmethods to explore the unique business contextat the base of the pyramid, the resulting datacollection process focused on both local needs andlocal culture. As one of our respondents explained:'bottom-up learnings are critical'.During the study, this respondent found that anumber of non-profit organizations could providevaluable and relevant information that comple-mented what was learned from the marketresearch.These organizations had developed an expertisein jointly promoting local social and economicdevelopment. To move forward, the respondentindicated that it would be necessary to establishrelationships with non-profit organizations thatcould provide knowledge about the local context.He did note, however, that although these relation-ships would be important, the MNC would need to'overcome a lack of transparency'typically found inits dealings with this sector of society.Managers at MNC #3 also recognized that theirexisting local partners did not have the necessaryknowledge and capabilities to reach the targetedlow-income market. In fact, both managers inter-viewed were not only worriedabout the subsidiary'slack of familiarity with base-of-the-pyramid mar-kets, but were also fearful of the negative impactthat transferring existing biases might have on thesuccess of the new venture. They therefore decidedto launch a pilot project in a country where theMNC did not currently have a local subsidiary. Thisopportunity could then be, as one respondentnoted, a 'learning market' where the 'situation isnot to control', but rather 'keep it simple' and'maximize flexibility'.These managers further explained that the stan-dard company model for international expansion



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was inappropriate for this environment. A success-ful strategy would require more than leveragingexisting internal capabilities or adapting standardentry strategies. They acknowledged the impor-tance of identifying partners with the appropriatecontext-specific knowledge, and looked to 'accessexternal competencies where ever possible'. Thispartnership model also recognized that many ofthese potential partners were organizations with astrong social mission. This meant that the ventureneeded to incorporate social as well as economicperformance goals, an approach that expandedupon the company's traditional metrics.In discussing its low-income market initiatives,one of the respondents at MNC #4 noted thatresources for new ventures were typically allocatedaccording to whether the firm 'could leverageexisting products, consumers, or channels'. Thecompany also looked for 'something that [it] canown'. Base of the pyramid ventures, however, didnot fit with traditional assumptions about marketentry strategies. As the respondents explained,these initiatives involved a new product, targeteda new set of customers, and requireda new mindsetabout distribution. Thus, the managers recognizedthat they faced difficult hurdles in generatinginternal support and the needed funding.Rather than tackle these issues head on, one ofthe managers found that the best strategy was toacknowledge that this was a new business environ-ment. As opposed to developing an argument basedon premium brands and high margins, which thecompany 'knows', she felt that the most attractivemetric for this venture was penetration. However,the 'penetration game' was something the com-pany 'knew nothing about', and to get supportinvolved demonstrating that conventional hurdlerates are 'not written in stone'.To move forward, the respondent recognized the'need for high level strategic support'. Tobuild thissupport, she focused on 'benchmarking of compe-titors' and the fact that some of the firm's majorglobal rivals were already pursuing these types ofmarkets using metrics that evaluated both economicand social benefits. She argued that, if the firmrelied on its traditional capabilities and mindset, itcould be missing a substantial opportunity. High-lighting the potential risk from failing to respondenabled managerial support to coalesce around thisinitiative. This created the potential to override thetraditional metrics used in the resource allocationprocess and generate more internal support for apilot venture.

In summary, then, the interviews with MNCmanagers and associated in-depth analysis of thesenew ventures pointed to the shortcomings ofexisting theory and practice in the areas of EMand global strategy. The four companies were allprofitable and considered to be well-run firms andhighly successful in top-of-the-pyramid markets.However, as highlighted in Table 2, when enteringlow-income markets,these firms found that relyingon global capabilities articulated in the transna-tional model was not sufficient and, at times, couldactually be constraining. In all four firms themanagers recognized the need for an additionalcapability. Together, these findings lead to thefollowing propositions:Proposition la. Top-of-the-pyramidhigh income)and base-of-the-pyramid low-income) markets willrequiredifferent trategiesand mix of capabilities.Proposition lb. When enteringbase-of-the-pyramidmarkets,traditionalcapabilities in global integrationand national responsivenessmight actually inhibiteffectiveness.Proposition Ic. When enteringbase-of-the-pyramidmarkets, irmscannotrelyon the transferorprotectionwithin firm boundariesof knowledgeand resourcesdeveloped n top-of-the-pyramid arkets.Proposition id. When enteringbase-of-the-pyramidmarkets,firms will need additional capabilitybeyondthose of global efficiency,national responsiveness ndtransferof existingknowledge,which are used success-fully in top-of-the-pyramid arkets.Learnings from archival and case analyses:strategies for the base of the pyramidIn particular, the interviews suggest how existingbiases associated with top-of-the-pyramid marketscan blind managers to the realities of doingbusiness in the base of the pyramid. Relying onexisting technology, products, partners, channels,and metrics can serve to doom such ventures tofailure. Leveraging existing knowledge and theexploitation of global efficiencies can preventsuccess as it precludes the deep listening and localknowledge generation needed to succeed in suchmarkets. National responsiveness is also notenough, especially if pre-existing solutions orbusiness models are wholly inadequate for thecontext at the base of the pyramid. Indeed, anentirely new capability appears to be necessary.



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

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

Table 3 Need for a new global capability:analysisof archivalmaterial,case studies, and interviewswith MNCmanagersStrategiesof successfulbase-of-the-pyramidmarketentries Strategiesof failed(orpoorlyperforming)base-of-the-pyramidmarketentriesCollaboratingwith non-traditional artners Collaboratingwith non-traditional artners* Recognizedthe value of both corporate and non-corporate * Heavyrelianceon expertise of local subsidiaryor familiarpartners partners* Proactivelyestablished relationshipswith non-profitand * Limitedor no contact with non-profitand other non-other non-traditionalpartnerorganizations traditionalpartnerorganizations* Relied on non-corporate partners or expertise on social * Tended to relyon familiaror existing partners or informationinfrastructure nd local legitimacy about new marketsand the local contextCo-inventing ustomsolutions Co-inventing ustomsolutions* Often linkedwith multiple distributors,who modified * Preferred o sell the product as is and tried to limit

product differentlybefore selling to final user modificationsby distributorsand users* Allowed for user innovation and modification * Substantialeffort to protect property rights (e.g., patents,* Productand business model design co-evolved brand names)* Tended to view product in terms of the functionalityit * Product was developed before business model was designedprovided * Tended to view value proposition in terms of product, notfunctionalityBuildingocal capacity Buildingocal capacity* Recognizedthe value of existing local institutions * Tended to view the environment in terms of the institutions* Providedtrainingto local entrepreneursand other partners that were missing* Often saw gaps in local infrastructure r missing services as * Limitedcontact with localentrepreneursand local institutionspotential opportunities * Often saw gaps in local infrastructure s challenges orproblems that had to be overcome



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A variety of non-corporate partners providedaccess to important information on target custo-mers and the overall business environment thatwas not available in the corporate sector. This goesfar beyond the typical focus on customers andsuppliers (Andersson et al., 2002). As suggested byHart and Sharma (2004), greatly increased uncer-tainty about what knowledge is useful increases theimportance of radicaltransactiveness, or the abilityto identify and interact effectively with a diversityof non-traditional stakeholders. By including inputfrom civil society, local community groups, and thepublic sector, firms were better able to understandand leverage existing social strengths in thesebusiness environments. In addition, they couldbetter understand which societal concerns were, asone MNC respondent noted, 'myths and whichwere realities'. These non-traditional partnerscould provide information on the local context,local legitimacy, and access to needed resources(Rondinelli and London, 2003).One initiative, for example, utilized non-tradi-tional partners to overcome a lack of potentialsources of external funding. The managers identi-fied a multilateral institution and an NGO aspotential partners, and developed a business planthat highlighted how a successful initiative couldhelp both these organizations achieve their socialobjectives. As a respondent noted, while it 'takestime to build credibility and relationships in thepublic sector', it was invaluable 'getting to knowthe core influentials'. By getting the support ofthese organizations, the company could secureimportant access to critical financial, legitimacy,and knowledge resources.In contrast, another firm relied primarily oneconomic metrics and capabilities developed fortop-of-the-pyramid markets. The national govern-ment was viewed primarily as an important sourceof funding for base-of-the-pyramidventures in twodifferent countries. A pre-existing technology wasintroduced, with the governments serving as keybusiness partners. The venture struggled to createlocally acceptable product offerings as it did notdevelop relationships with local partners thatcould provide an awareness of the actual needsand desires of base-of-the-pyramid customers. Inaddition, in both countries the governments wereeconomically unstable, and the base-of-the-pyramid ventures had substantial trouble withtheir cash flow.

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

sector, the development sector, and the localcommunity. The partnership recognized the exist-ing social infrastructureand was designed so thatknowledge and benefits flowed between each set ofpartnerships.Forexample, the company identified,manufactured, and sold context-appropriate farmequipment to the development sector partner,which in turn leveraged local social capital toprovide micro-credit financing to small farmersfor the purchase of the equipment. The companyalso recognized the local need for a steady source ofalternative income, and committed itself to pur-chasing all of the farmers' production, creating aloyal source of supply. As opposed to concentratingsolely on economic efficiencies and economic-oriented metrics, the for-profitventure was able togenerate significant growth by creating a collabora-tive model that enabled it to better understand andleverage the social context. Using this approach,the company recognized and valued the role of theother two partners,even though it was dealing withunfamiliar organizations.In contrast, another local venture has beenunable to create needed cash flow, owing, insignificant part, to its inability to establish effectivecollaborations with non-traditional partners. Inthis case, the initiative has struggled to developan understanding of the social context, and has notgenerated mutually beneficial economic and socialincentives. As a result, the venture has not securedthe support of key partners who could providemuch needed financial and knowledge resources.Co-inventing custom solutions: building fromthe bottom upIn pursuing low-income markets in developingcountries, firms must adjust to an environmentwhere social, not legal, contracts dominate (deSoto, 2000), and where accurate knowledge aboutpotential consumers is not readily available (Groshand Glewwe, 1995). Assessing context-specificinformation appearsto requirea more participatoryapproach in which all parties need to be willing toshare information (Chambers, 1997). This extendsfar beyond the idea of 'national responsiveness'(adapting pre-existing solutions to local condi-tions), which pervades the existing literature onglobal strategy (Bartlett and Ghoshal, 1989).In fact, our analysis indicated that entry into low-income markets at the base of the pyramid indeedbenefited from identifying local partners who couldactively contribute to venture conceptualization byadding local content to the product design.



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Entrepreneurshipby local distributorswas encour-aged by providing flexibility in how the finalproduct or service could be marketed or delivered.As one corporaterespondent emphasized, their goalwas 'building infinite flexibility into the productand, therefore, selection of third-party partners'.Incontrast, unsuccessful initiatives tended to rely oncontrolling the adaptation of existing productsand, focusing on the weaknesses in the environ-ment, they also made substantial efforts to protectproperty rights, including preventing user ordistributor modification.Furthermore, n successfulventures, the emphasiswas on maximizing the functionality of the productoffering. This often included having the productand business model development co-evolve. Part-ner organizations co-designed the entry strategy,including the delivery of the product or service.As one respondent indicated, a successful initiativerequires 'everybody who touches it to makemoney'. Poorly performing ventures, on the otherhand, tended to view the value proposition interms of the product itself, and often completed thedevelopment process at a centralized and geogra-phically distant location (for example, at corporateR&D centers) prior to designing the businessmodel.One successful venture, for instance, decided toforgo adopting the traditional pricing model of costplus margin. Rather, in discussions with localpartners, they identified the appropriate sellingprice first. By 'reverse engineering' and 'maximiz-ing local knowledge and entrepreneurship', as onerespondent noted, they could then jointly design aproduct and business model that provided thefunctionality required and offered profit marginsthat were acceptable for a high-volume business.In other example a locally based MNCwas unableto enter base-of-the-pyramid markets effectively,primarily because its entry strategy was based onmaking an incremental adaptation to a currentproduct. By removing some of the existing func-tionality, it was able to create a lower-cost versionof one of its mainstream products. Selling this lessexpensive version through its traditional distribu-tors did allow the firm to capture some additionalprice-sensitive customers. However, the MNC wasnot successful in reaching the vast majority of low-income customers. This low-income market wouldhave been much better served if the companyhad co-designed the product from the bottomup (as opposed to the top down) with localpartners who understood what set of functionalities

were most important to base-of-the-pyramidcustomers.Developing local capacity: sharing resourcesacross boundariesThe transnational model, the predominant view ofglobal strategy, focuses on global integration,national responsiveness, and worldwide learning(Bartlett and Ghoshal, 1989). This perspectiveemphasizes sharing resources internally and max-imizing the economic benefits to the firm (Buckleyand Casson, 1991). However, our analysis suggeststhat firms interested in targeting base-of-the-pyramid markets must also consider both societalperformance and the sharing of resources outsidefirm boundaries - local capacity building - to besuccessful.Firms entering low-income markets may facenovel challenges from NGOs and civil society. Asone respondent noted, he was worried about 'pushback from NGOs', including 'demonstrations' andclaims of 'corporate imperialism'. Respondentsindicated that the increased attention on globalpoverty, the growing anti-globalization movement,and the threat of intra-country wars, regionalconflicts, crime, and terrorismhighlighted the factthat ventures in the base of the pyramid requirestrong consideration of the social impact on localcommunities.3One important way in which successful venturesaddressed the need to consider societal perfor-mance was by incorporating local capacity buildingdirectly in their business models (rather thanthrough the more conventional approach of corpo-rate philanthropy as an activity separate from thebusiness). Forexample, several successful initiativesincluded training programsfor local entrepreneurs.Others identified mutually beneficial opportunitiesthat built the capacity of existing institutions, suchas micro-lending organizations, or filled in gapsin local infrastructure through providing basicservices.The financial investment in local capacity doesnot necessarily have to be large to create substantialbenefits. For example, strategic bridging offers adifferent and potentially useful way of flexiblyadjusting the level of collaboration (Westley andVredenburg, 1991). Similar to the entrepreneurfilling a structural hole (Burt, 1992), an MNC canbecome an unofficial strategic bridge betweenexisting organizations that are having difficultycooperating with each other. By becoming astrategic bridge, the MNC becomes a conduit



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-;Y7 Strategies for emerging markets Ted Londonand StuartLHart364

and can enhance the flow of information,capabilities, and financial resources between theseorganizations.In one Latin American country, for instance, alocally based MNC was able to target effectively alow-income market only after serving as a bridgebetween local distributors and base-of-the-pyramidcustomers whom these distributors were havingtrouble reaching effectively. In this case, the MNCspanned the social gaps between organizations byproviding value-added advisory services and train-ing programs that strengthened the inefficientpractices by the intermediaries, built local knowl-edge, and created surplusvalue for local consumers.Using an approach of identifying and developingexisting local capacity,the MNC covered the cost ofproviding the service, improved its sale of rawmaterials, enhanced inter-organizational commu-nication and trust, and generated additionalreputational and branding opportunities.Another MNC venture, also interested in improv-ing the local supply chain, has been unsuccessful todate, primarily because of its inability to developlocal capacity. The initiative was grounded in thefirm'sreputation for corporate social responsibility.The company's social responsibility capabilitieswere, however, based mainly on donating resourcesto third parties. As a result, this approach did notinvolve investments by the company's operatingunits, and was not focused on identifying andstrengthening business-critical existing institutionsin the local market environment. To date, the firmhas not been successful in capacity building in thetargeted low-income market. The supply chainremains weak, and the new initiative is yet tobridge the gaps in local capabilities necessary tocreate a successful business model.

Together, these results lead to the followingpropositions:Proposition 2a. When enteringbase-of-the-pyramidmarkets, dentifying nd leveraging xistingstrengths nthe businessenvironment an enhanceeffectiveness.Proposition 2b. When entering base-of-the-pyramidmarkets, strategies that include understanding the socialcontext, building from the bottom up, and sharingresourcesacross organizational boundaries can enhanceeffectiveness.Implications: a new global capabilityOur findings from the interviews, case studies, andarchival material seem to provide an important

opportunity to extend the existing literatureson global strategy and EMs. Both these literaturesrely on implicit assumptions that are embedded intheir theoretical development. These assumptions,however, are challenged when MNCs enter low-income markets. Indeed, MNC advantage, and theassociated ability to overcome a liability of foreign-ness, is assumed to come from the transfer ofknowledge and resources within firm boundaries(Hymer, 1976; Buckley and Casson, 1991). Thetransnational model identifies global efficiency(leveraging knowledge and resources), nationalresponsiveness (modifying knowledge andresources),and worldwide learning (sharing knowl-edge and resources)as the crucial capabilities for asuccessful multinational firm (Bartlett andGhoshal, 1989).In our examination of four ongoing MNCinitiatives, however, we found that these venturescould not rely solely on the traditional capabilitiesthat a global firm is thought to have. In each ofthe four MNCs, capabilities in global efficiency,national responsiveness, and worldwide learningwere not sufficient and, at times, could actually beconstraining. When entering base-of-the-pyramidmarkets, successful organizations possessed anadditional capability.As highlighted by the success-ful strategies used to enter low-income markets,this capability appeared to be based on valuingand facilitating the bottom-up co-invention, by adiversity of partners, of locally appropriate solu-tions. These solutions also involve investingresourcesto develop capacity beyond the protectiveboundaries of the firm.Indeed, this fourth global capability could beconsidered 'social embeddedness' or the ability tocreate competitive advantage based on a deepunderstanding of and integration with the localenvironment. This capability involves the ability tocreate a web of trusted connections with a diversityof organizations and institutions, generate bottom-up development, and understand, leverage, andbuild on the existing social infrastructure. Ratherthan looking to overcome weakness in an emergingeconomy business environment, this capability isbased on the ability to craft a strategy that relies onresources and knowledge in the external environ-ment as sources of competitive advantage. Thisapproach challenges and extends the more top-down, internally oriented orientation favored inthe transnational model of leveraging and transfer-ring resources within the safe confines of the firm'sboundaries.



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Management researchers have emphasized thatMNCs, in particular, have the ability to formpartnerships with a wide variety of organizations.Forexample, Hitt et al. (2000) found that local firmsin developing countries value reputation and awillingness to share expertise when selectingpartnerorganizations. Similarly,Frost(2001) foundthat larger parents and local subsidiaries withgreater resources are viewed as more credibleexchange partners, as they have greater opportu-nities for reciprocity.The results of this exploratorystudy suggest that this role needs to be expandedeven further if MNCs are to successfully enter thevast markets at the base of the pyramid.MNCs must overcome cross-organizationaldiffer-ences to convene a diversity of stakeholders andcreate relationships with non-traditional partners(London and Rondinelli, 2003). Given theirresources, reputation, and 'convening power',MNCs have the potential to attract the range ofpotential partners needed to succeed in thisdomain. Our results suggest that firms enteringlow-income markets in developing countries maynot be able to rely on traditional partners, familiarstructures, or preconceived notions about thepattern of economic development (Arnold andQuelch, 1998). At the base of the pyramid, MNCsmust develop relationships that enable them tobetter understand the social context of an environ-ment that is local, diverse, dynamic, complex,and unpredictable (Chambers, 1997; Dawar andChattopadhyay, 2002; Hart and Sharma, 2004).And although large local firms can still be impor-tant partners, MNCs may also need to developrelationships with community groups, non-profitorganizations, and local entrepreneurs, and buildthe capacity of local institutions (Sharma et al.,1994; Prahaladand Hammond, 2002). Developingrelationships with these organizations, however,requires greater transparency, an ability to under-stand and appreciate local societal conditions, andthe skill to recognize and deliver the socialperformance that these partnersvalue.Furthermore, whereas the conventional wisdomon emerging economies suggests that local partnersare the ones that must unlearn, in low-incomemarkets our study suggests that MNC subsidiariesmay be the ones with the most unlearning to do(Norberg-Hodge, 1991; Chambers, 1997; Autio et al.,2000; Dawar and Chattopadhyay, 2002). Thesemarkets are regulated by informal rules, socialcontracts, and shared use of assets (de Soto, 2000).Entry strategies may therefore require greater

inclusiveness and less reliance on protectingknowledge and technology, strategies that may becounterintuitive to subsidiary managers (Autioet al., 2000). This is highlighted in our study bythe benefits that organizations gained from thecapability to co-invent custom solutions with avariety of different stakeholders.For example, maintaining flexibility in the pro-duct and the business model can allow localentrepreneurs, who are more familiar with localculture and customer needs, to innovate proac-tively (von Hippel, 1998). Similar to the idea of usercommunities and open source (MacCormackandHerman, 1999; von Hippel, 2001), the closer theinnovation efforts are to the end user, the morelikely they are to respond to user needs andincorporate desired functionality. Competitiveadvantage is therefore premised less upon theprotection of pre-existing proprietary technologyand intellectual property,and more on the develop-ment of trust, social capital, and permeable bound-aries (Raymond, 1999).This extends to the idea of capability develop-ment beyond firm boundaries. By supporting localcapacity building, MNCs can generate both eco-nomic and social benefits (Sen, 1999). To do thissuccessfully, however, firms must be able to under-stand the local context and recognize holes in thesocial structurethat need to be filled (Burt, 1992).This can mean acting as a bridge to connect third-party organizations and thus reduce or eliminateinefficient practices in the value chain (Sharmaet al., 1994; Prahalad and Hammond, 2002). Inaddition, firms can also benefit from effectivelyworking with and supporting financial and otherinstitutions that facilitate value creation and entre-preneurship in emerging economies (George andPrabhu,2000). Hence, by developing skills to createcapabilities outside of its boundaries, an MNC canleverage local social development to improve itseconomic performance, while at the same timebeginning to addressemerging challenges to unfet-tered globalization (Soros,2002; Stiglitz, 2002).Taken together, these results suggest someimportant extensions to the literature on strategiesfor EMs and the transnational model of globalcapabilities. Firms entering low-income marketscannot rely on a strategy that is based on over-coming limitations in the business environment.Successful ventures did not assume that the localbusiness environments would become more Wes-tern in orientation over time. As a result, they didnot implement a strategy based on managing this



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

Proposition 3. When enteringbase-of-the-pyramidmarkets, irmswith a capability n social embedded-ness are most likelyto be successful.

Conclusions and future researchThe pursuit of low-income markets in emergingeconomies represents an important new futuredirection at the intersection of strategic manage-ment and IBresearch.Rumelt et al. (1994), in theirreview of the strategy discipline, identified 'Whatdetermines the international success and failure offirms?' as one of the five most fundamentalquestions in the field. In his review of the IBliterature,Peng (2001: 809) was even more explicit.He asserted that 'emerging economies are likely tobecome the new battleground for IB competitionand that researchersneed to pay careful attentionto the institutional context in which IB activitiestake place'. Within developing countries, however,the real promise for significant growth lies beyondreaching the wealthy elite currentlybeing servedbyMNCs (Prahalad and Lieberthal, 1998). Tappinginto markets at the base of the pyramid can provideMNCswith access to a fast-growingpopulation thatis potentially the most exciting growth opportunityof the future (Hartand Christensen, 2002).Yet, although an increasing number of firms areexploring the economic opportunities at the baseof the pyramid, strategies in these markets haveneither been empirically examined in the literatureon global strategy (Hout et al., 1982; Bartlett andGhoshal, 1989) nor subsidiary strategies for emer-ging economies (Hoskisson et al., 2000). This studytherefore sought to examine how MNCs and otherenterprises pursue opportunities at the base of thepyramid, and which strategies appear to be themost successful.

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

national model of global strategy. Our in-depthanalysis of archivaldata and 24 original case studiesbegan to explore these limitations by identifyingimportant elements of successful low-incomemarket strategies, including collaborating withnon-traditional partners,co-inventing custom solu-tions, and building local capacity. As our resultssuggest, firms will need to develop a fourthcapability, social embeddedness, which allowsthem to understand and leverage the strengths ofthe market environment at the base of the pyramid.These findings from our qualitative empirical studyhave important implications for both theory andpractice.At the theoretical level, successful pursuit of thistype of strategy in emerging economies appears torequire that MNCs move beyond the traditionalview of transnational success (Bartlettand Ghoshal,1989). These firms will need to integrate a fourthglobal capability when entering low-income mar-kets. Ourlongitudinal, in-depth exploration of fourmultinational ventures indicated that reliance oncapabilities in national responsiveness, globalefficiency, and worldwide learning was insufficientat best, and could in fact negatively impact onperformance. Ratherthan creating centrally devel-oped 'one-size-fits-all'global solutions, or adaptingsolutions created elsewhere to local conditions,successful pursuit of base-of-the-pyramid marketsappears to require firms to build, consolidate, andleverage learning from the 'bottom up'. Thiscapability is also substantially different from theability to leverage worldwide learnings, whichassumes that the appropriate knowledge alreadyexists within the firm.Furthermore,entering these huge markets at thebase of the pyramid requires a recognition thattraditional views of economic development andbusiness strategy may not apply. MNCs cannot relyon the assumption that all markets in the develop-ing world are evolving in similar manner toward amore Western-style economy, and they shouldavoid designing a strategy based on overcominglimitations in the business environment. However,as Tallman (1991: 71) indicates, even in developedcountry environments '...an MNE may enter a newforeign market, an innovative step, but use provenstrategies and structural forms to reduce its uncer-tainty in that market'. These approaches, and theassociated implicit assumptions, are likely to beinappropriate in the developing world, where thegap between the rich and poor is substantial andgrowing (Hammond, 1998). Instead, strategies for



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base-of-the-pyramid markets in emerging econo-mies must recognize that social contracts and socialinstitutions dominate, traditional partners maylack relevant expertise, and social performancematters. Ratherthan look to overcome weaknessesin the business environment, firms entering thesemarkets should craft a strategy that envisionsorganizations, institutions, and knowledge in theexternal environment as a basis for creatingcompetitive advantage.This line of researchalso has important manage-rial implications. An increasing number of MNCsare exploring low-income markets. Understandingwhich types of base-of-the-pyramid market strate-gies positively impact on venture performance willallow managers to better assess whether, and how,their firms should be pursuing these opportunities.Preliminary evidence suggests that successful pur-suit of low-income marketsin emerging economiesrequires MNCs to fundamentally rethink theirbusiness models. Scalability, flexibility, decentrali-zation, knowledge sharing, local sourcing, frag-mented distribution, non-traditional partners,societal performance, and local entrepreneurshipappear to be important to the success of suchbusiness ventures. This is a significant departurefrom the current received wisdom of world-scaleproduction, global supply chains, and local adapta-tion of centrally developed solutions.Indeed, given the opportunities and challenges ofthe low-income market context, it may be neces-sary for MNC subsidiary managers to developmultiple strategies depending on which markets(top, middle, or low segments) within a countrythey are targeting. These various 'within-country'strategies appear to require a different mix of thefour MNC capabilities (global efficiency, nationalresponsiveness, worldwide learning, and socialembeddedness). For example, exploration oflow-income markets may benefit from socialembeddedness and worldwide learning. However,capabilities in global efficiencies and nationalresponsiveness may actually do more harmthan good, and may need to be activelydiscouraged.Furthermore, although capabilities developed forand in top-of-the-pyramid markets do not appearto travel well to base-of-the-pyramid businessenvironments, the opposite may not be true. Therehas been considerable debate over the challenges ofcreating disruptive innovations (Christensen,1997), and it has been suggested that the base ofthe pyramid may offer a unique opportunity to

incubate disruptive technologies (Christensen etal.,2001; Hart and Christensen, 2002). Interestingly,capabilities developed in this business environmentmay also have the opportunity to 'move up thepyramid' and challenge existing capabilities devel-oped in top-of-the-pyramid markets. Hence, cap-abilities and strategies developed at the base of thepyramid may provide the missing means by whichfirms can catalyze internal creative destruction(Schumpeter, 1962). In developing the structure,processes, and partnerships to encourage thedevelopment of social embeddednesses, firms canpotentially generate the capability to break oldroutines and boundaries and reinvent themselves(Schumpeter, 1934).Firms with capabilities in social embeddedness,for instance, may be in a position to createstrategies for a more inclusive capitalism thataddresses both the growing opposition to global-ization and the limitations of global resources.Business models for the base of the pyramidcannot match the consumptive nature of existingtop-of-the-pyramid strategies (Hart, 1997). Theresimply arenot enough resourcesfor the four billionpeople at the base of the pyramid to mimic'Western' approaches to economic development.Once successfully incubated in base-of-the-pyramidmarkets, it is entirely possible that these newcapabilities could also address some of the morevexing developed world environmental and socialproblems.For example, if distributed, environmentallysustainable energy production ventures are shownto be economically viable at the base of thepyramid, it may be only a matter of time beforethese technologies disrupt the reliance in top-of-the-pyramid markets on unreliable sources of fossilfuels, an aging energy distribution network, and aproduction method that may negatively affect theglobal environment (Hart and Christensen, 2002).In general, the capability to include more voices instrategyand product development and to profitablygenerate societal benefits could well becomeincreasingly valuable for companies looking fornew sources of competitive advantage in saturateddeveloped world markets.As this was an exploratory study, there arelimitations to the conclusions that can be drawn.In the future, additional case studies and broaderempirical analysis would be valuable in extendingthe results of this research effort. From an academicperspective, the study of business strategies in low-income markets provides an exciting opportunity



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to explore emerging trends that are part of animportant future research direction for strategyandIB scholars (Rumelt et al., 1994). Future researchinthis areacould include examining how firms under-stand and create competitive advantage in unfami-liar environments, examining what strategies arevaluable for protecting core competencies when thefirm is facedwith permeableand shiftingboundaries,and exploring the value added by MNC corporateheadquarters in base-of-the-pyramid markets. Inaddition, scholarsmay want to compare MNCs andlarge domestic firms that operate in low-incomemarkets in emerging economies. When enteringbase-of-the-pyramid markets, domestic companiescould have both advantages (e.g., the liability offoreignness is potentially lower) and disadvantages(e.g., strong existing biases toward copying Westernbusinessapproachesand the belief that since they arenationals of this country they 'know' this market)ascomparedwith their MNC competitors.In sum, entry into base-of-the-pyramid marketsmay requirea global capabilitybeyond the adaptiveskills of national responsiveness and centralizedcontrol inherent in global efficiency, and a marketentry strategy that moves past a reliance onimported business models based on extractingknowledge and protecting and controlling resourceflows. The challenge is nothing less than reinvent-ing strategiesfor EMs o better reflect the realitiesofongoing corporate efforts to enter markets at thebase of the economic pyramid.AcknowledgementsWe are gratefulfor comments on an earlier versionthat was presented at the Strategic ManagementSociety Conference in November 2003, where themanuscriptwas awarded Best Conference Paper -HonorableMention. We also thank the anonymousreviewers and JIBSSpecial DepartmentalEditorJoan

EnricRicartor their insightfuland instructive ugges-tions in developing this paper.Notes

1For instance, multinationalssuch as Procter &Gamble, DuPont, Dow Chemical, Hewlett-Pac

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Reinventing Strategies for EM