For Triad-based MNEs, even their traditional “global strategy” is not very global. It often focuses on affluent customers in North America, Europe, and Japan. Even when they enter emerging economies, they often concentrate on high-income customers there. Thus, this strategy only deals with the approximately one billion people at the top of the global economic pyramid and virtually ignores the vast numbers at the bottom. The second tier of the pyramid consists of over one billion people making $2,000–$20,000 each year. Four billion people in the world at the base of the pyramid earn less than $2,000 each per year (see Figure 1.3) and are typically ignored.

FIGURE 1.3 The Global Economic Pyramid

Sources: Adapted from (1) C. K. Prahalad & S. Hart, 2002, The fortune at the bottom of the pyramid, Strategy+Business, 26: 54–67; (2) S. Hart, 2005, Capitalism at the Crossroads (p. 111), Philadelphia: Wharton School Publishing.

The MNEs’ strategy is easy to understand. They assume that the poor have no money and that there are no profitable opportunities. However, despite low individual income, the poor’s collective buying power is substantial. The poor in Rio de Janeiro, Brazil, for instance, have a total purchasing power of $1.2 billion. While existing business models on how to serve affluent customers would indeed have a hard time at the base of the pyramid, entrepreneurial opportunities exist and are being exploited mostly by local firms and a small number of far-sighted MNEs. In India, for example, Arvind Mills introduced Ruf and Tuf jeans, a ready-to-make kit priced at $6, which is now the market leader in India, beating global brands such as Levi’s that sell for $20–$40 a pair. In rural Bangladesh, where the per capita income was only $300, few could afford cell phones. So Grameen Telecom innovatively provided a $175 “micro loan” with a cellular phone to entrepreneurs, who would then sell phone usage on a per-call basis to locals and make $300 a year. Grameen’s founder Muhammad Yunus won a Nobel Peace Prize in 2006.

Given that developed markets are well saturated, the base of the pyramid may indeed provide strong growth engines, not only for emerging economies but also for developed markets. For example, Unilever, based on the success of its Indian subsidiary, Hindustan Lever, in rural India, has now focused on the base of the pyramid as a strategic priority at the corporate level. More than 44% of Unilever’s sales worldwide now come from emerging economies. However, adaptation will be crucial. In India, Unilever sells 70% of its shampoo in one-use sachets for a couple of cents. While the big bottle that Western consumers take for granted has better value, most Indian consumers at the base of the pyramid can afford only small sachets. At present, automakers such as GM and Honda are racing to develop $5,000 car models for the emerging Chinese middle class. Given these automakers’ inability to profitably produce such models in the United States and Japan, imagine the profit potential these developed-in-China models may have back home where entry-level cars now sell for close to $10,000.

To the extent Western MNEs often find it tough going in these unfamiliar territories, it is not surprising that some new MNEs from emerging economies—called Third World multinationals or “dragon multinationals”—well versed in such an alternative business model are capturing the hearts, minds, and wallets of customers in emerging economies. In the Philippines, Jollibee beats the mighty McDonald’s and is now venturing out to Southeast Asia and the Middle East. Out of China, Lenovo aspires to become “king of the hill” in the PC battle. In January 2008, India’s Tata Motors unleashed a “one lakh” car (one lakh is 100,000 rupees, roughly $2,500), sending shockwaves throughout Western automakers. For now, Tata Motors is happily serving the Indian market, but what if it decides to export this super-low-cost car to other countries?

Overall, discovering creative ways to configure products and services to tackle the base of the pyramid has great ethical and moral benefits because they improve the standards of living for many people and facilitate economic development. However, firms do not have to do this for charitable purposes. There is money to be made by such a strategy of a great leap downward. The million (or billion) dollar question is: How?

What are the more attractive industries for the base of the pyramid?
 

Transcribed Image Text:

Top Tier Second Tier Per capita GDP> $20,000 Approximately one billion people Base of the Pyramid Per capita GDP $2,000-$20,000 Approximately one billion people Per capita GDP <$2,000 Approximately four billion people Top Tier Second Tier Per capita GDP> $20,000 Approximately one billion people Base of the Pyramid Per capita GDP $2,000-$20,000 Approximately one billion people Per capita GDP <$2,000 Approximately four billion people

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The base of the pyramid BOP represents a large consumer market consisting of billions of people with low individual incomes While traditional global strategies of multinational enterprises MNEs often ... View the full answer