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With the end of the Cold War, the former Soviet Union and its allies, as
well as
China,
India, and
Latin America,
opened their closed markets to foreign investment in a cascading fashion.
Although this significant economic and social transformation has offered vast
new growth opportunities for multinational corporations (MNCs), its promise has
yet to be realized.
First, the prospect of millions of “middle-class” consumers in developing
countries, clamoring for products from MNCs, was wildly oversold. To make
matters worse, the Asian and Latin American financial crises have greatly
diminished the attractiveness of emerging markets. As a consequence, many MNCs
worldwide slowed investments and began to rethink risk–reward structures for
these markets. This retreat could become even more pronounced in the wake of
the terrorist attacks in the
United
States last September.
The lackluster nature of most MNCs’ emerging-market strategies over the past
decade does not change the magnitude of the opportunity, which is in reality
much larger than previously thought. The real source of market promise is not
the wealthy few in the developing world, or even the emerging middle-income
consumers: It is the billions of
aspiring poor who are joining the
market economy for the first time.
This is a time for MNCs to look at globalization strategies through a new
lens of inclusive capitalism. For companies with the resources and persistence
to compete at the bottom of the world economic pyramid, the prospective rewards
include growth, profits, and incalculable contributions to humankind. Countries
that still don’t have the modern infrastructure or products to meet basic human
needs are an ideal testing ground for developing environmentally sustainable
technologies and products for the entire world.
Furthermore, MNC investment at “the bottom of the pyramid” means lifting
billions of people out of poverty and desperation, averting the social decay,
political chaos, terrorism, and environmental meltdown that is certain to
continue if the gap between rich and poor countries continues to widen.
Doing business with the world’s 4 billion poorest people — two-thirds of the
world’s population — will require radical innovations in technology and
business models. It will require MNCs to reevaluate price–performance
relationships for products and services. It will demand a new level of capital
efficiency and new ways of measuring financial success. Companies will be
forced to transform their understanding of scale, from a “bigger is better”
ideal to an ideal of highly distributed small-scale operations married to
world-scale capabilities.
In short, the poorest populations raise a prodigious new managerial
challenge for the world’s wealthiest companies: selling to the poor and helping
them improve their lives by producing and distributing products and services in
culturally sensitive, environmentally sustainable, and economically profitable
ways.
Four Consumer Tiers
At the very top of the world economic pyramid are 75 to 100 million affluent
Tier 1 consumers from around the world. (See Exhibit 1.) This is a cosmopolitan
group composed of middle- and upper-income people in developed countries and
the few rich elites from the developing world. In the middle of the pyramid, in
Tiers 2 and 3, are poor customers in developed nations and the rising middle
classes in developing countries, the targets of MNCs’ past emerging-market
strategies.
Now consider the 4 billion people in Tier 4, at the bottom of the pyramid.
Their annual per capita income — based on purchasing power parity in U.S.
dollars — is less than $1,500, the minimum considered necessary to sustain a
decent life. For well over a billion people — roughly one-sixth of humanity —
per capita income is less than $1 per day.
Even more significant, the income gap between rich and poor is growing. According to the United Nations, the richest 20 percent in the world accounted for about 70 percent of total income in 1960. In 2000, that figure reached 85 percent. Over the same period, the fraction of income accruing to the poorest 20 percent in the world fell from 2.3 percent to 1.1 percent.
This extreme inequity of wealth distribution reinforces the view that the
poor cannot participate in the global market economy, even though they
constitute the majority of the population. In fact, given its vast size, Tier 4
represents a multitrillion-dollar market. According to World Bank projections,
the population at the bottom of the pyramid could swell to more than 6 billion
people over the next 40 years, because the bulk of the world’s population
growth occurs there.
The perception that the bottom of the pyramid is not a viable market also
fails to take into account the growing importance of the informal economy among
the poorest of the poor, which by some estimates accounts for 40 to 60 percent
of all economic activity in developing countries. Most Tier 4 people live in
rural villages, or urban slums and shantytowns, and they usually do not hold
legal title or deed to their assets (e.g., dwellings, farms, businesses). They
have little or no formal education and are hard to reach via conventional
distribution, credit, and communications. The quality and quantity of products
and services available in Tier 4 is generally low. Therefore, much like an
iceberg with only its tip in plain view, this massive segment of the global
population — along with its massive market opportunities — has remained largely
invisible to the corporate sector.
Fortunately, the Tier 4 market is wide open for technological innovation.
Among the many possibilities for innovation, MNCs can be leaders in
leapfrogging to products that don’t repeat the environmental mistakes of
developed countries over the last 50 years. Today’s MNCs evolved in an era of
abundant natural resources and thus tended to make products and services that
were resource-intensive and excessively polluting. The
United States’ 270 million people —
only about 4 percent of the world’s population — consume more than 25 percent
of the planet’s energy resources. To re-create those types of consumption
patterns in developing countries would be disastrous.
We have seen how the disenfranchised in Tier 4 can disrupt the way of life
and safety of the rich in Tier 1 — poverty breeds discontent and extremism.
Although complete income equality is an ideological pipe dream, the use of
commercial development to bring people out of poverty and give them the chance
for a better life is critical to the stability and health of the global economy
and the continued success of Western MNCs.
The Invisible Opportunity
Among the top 200 MNCs in the world, the overwhelming majority are based in
developed countries.
U.S.
corporations dominate, with 82; Japanese firms, with 41, are second, according
to a list compiled in December 2000 by the Washington, D.C.–based Institute for
Policy Studies. So it is not surprising that MNCs’ views of business are
conditioned by their knowledge of and familiarity with Tier 1 consumers.
Perception of market opportunity is a function of the way many managers are
socialized to think and the analytical tools they use. Most MNCs automatically
dismiss the bottom of the pyramid because they judge the market based on income
or selections of products and services appropriate for developed countries.
To appreciate the market potential of Tier 4, MNCs must come to terms with a
set of core assumptions and practices that influence their view of developing
countries.
We have identified the following as widely shared orthodoxies that
must be reexamined:
Assumption #1 The poor are not our target consumers because with our current
cost structures, we cannot profitably compete for that market.
Assumption #2 The poor cannot afford and have no use for the products and
services sold in developed markets.
Assumption #3 Only developed markets appreciate and will pay for new
technology. The poor can use the previous generation of technology.
Assumption #4 The bottom of the pyramid is not important to the long-term
viability of our business. We can leave Tier 4 to governments and nonprofits.
Assumption #5 Managers are not excited by business challenges that have a
humanitarian dimension.
Assumption #6 Intellectual excitement is in developed markets. It is hard to
find talented managers who want to work at the bottom of the pyramid. (We suggest reading the full article via
strategy-business.com starting with page 3.)
****
Business
today is a chess match without rules. Requiring nimble competitiveness in which
conventional thinking is discarded. InnoThink Group is provocative. Dynamic.
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