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Summary Sustainable Strategies - Session 2 Articles
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Sustainable StrategiesSession 2 - Sustainability Arenas | Bottom/Base-of-the-Pyramid
4 February 2020, 15:00-17:45
London, T., & Hart, S. 2004. Reinventing strategies for emerging markets: Beyond the
transnational model. Journal of International Business Studies, 35: 350-370.
- With established markets saturating, multinational corporations have increasingly
turned to emerging markets in the developing world, such as India, Indonesia, Brazil,
China and Mexico. These emerging market (EM) strategies have been targeted almost
exclusively at the wealthy elite. Yet, recently, a number of multinational corporations
(MNCs) have launched new initiatives that explore the market potential at the base of
the economic pyramid, the largest and fastest growing segment of the world’s
population. This article considers how MNCs can successfully enter these low-income
markets?
- Opportunities at the base of the economic pyramid (i.e. low-income markets):
• Most entrepreneurs and customers in low-income markets are poorly served by low-
quality vendors or are actively exploited by predatory suppliers and intermediaries →
possibility of generating both profits and consumer surplus.
• 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.
- Challenges at the base of the economic pyramid:
• Social contracts and social institutions dominate
Reaching these markets involves bridging the formal and informal economies. In the
informal economy, relationships are grounded primarily on social, not legal, contracts,
and the organisations with the most expertise in serving these markets – government
and civil society – have a strong social orientation. In low-income markets, informal
social boundaries often dominate over formal legal documentation.
• 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. Yet, this may not follow familiar patterns found in the developed
world: 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.
• Societal performance matters
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, Sustainable Strategies
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. 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 different model of development.
- Operating in emerging markets is challenging as the rule of law is often poorly
enforced. To address this uncertainty, MNCs entering these markets look for ways to
overcome limitations in the business environment. According to existing literature:
1. Firms design boundaries to protect internal resources and capabilities from
unintended spillover, and look for partner organisations that wield substantial capability
to fill voids in the business environment.
2. 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.
3. MNC managers must move beyond the imperialist mindset that everyone wants to
look and act like Westerners. 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.
- Approaches to global segmentation suggested by existing research:
1. Cluster countries along similar dimensions, with firms being encouraged to
concentrate on one cluster, or subset of countries, at a time.
2. Look for global segments that transcend national and cultural boundaries (recognise
within-country differences).
- This study argues that 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.
- To answer the research question, an exploratory analysis, involving interviews with MNC
managers, original case studies, and archival material, was conducted. To ensure
appropriate geographical and cultural diversity, ventures from Asia, Africa, and Latin
America were included.
- The analysis revealed important differences between low-income markets in emerging
economies and top-of-the-pyramid markets involving the wealthy and elite.
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, Sustainable Strategies
- Limitations of the transactional model in low-income markets in EE:
- The findings in the figure above, suggest the following:
• Top-of-the-pyramid (high income)and base-of-the-pyramid (low-income) markets will
require different strategies and mix of capabilities.
• When entering base-of-the-pyramid markets, traditional capabilities in global
integration and national responsiveness might actually inhibit effectiveness.
• 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.
• When entering base-of-the-pyramid markets, firms will need additional capability
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