Many of these companies have now realised the opportunities they were missing by ignoring the four billion individuals who live in lower income markets.
The key to success in these so-called 'base of the pyramid' (BoP) markets involves recognising that Western-style business practices may not work in these environments. The biggest challenge for businesses is not protecting intellectual property, dealing with corruption or overcoming lack of infrastructure, but generating business model innovation. This requires a deep understanding of, and interaction with, the local environment.
When entering a new market, firms often need to turn to partner organisations for local expertise. In some countries, this is even a legal requirement.
But companies exploring BoP opportunities should look beyond large local firms or national governments toward non-profit organisations, community groups and local government. Non-traditional partners can provide information on the local context and potential consumers, and help with building relationships.
Business agreements in these markets are often based on social capital and local reputation rather than legally binding contracts.
Honey Care Africa, the biggest producer of high-quality honey in East Africa, set up a three-way partnership between the private sector, the development sector and local communities. By doing so, it tapped into each partner's strengths: marketing from the private sector, microfinance and social connections from the development sector and entrepreneurial spirit and skills from villages. Honey Care also provided loans and training for local honey producers to ensure sustainability. Not only did it manage to grow its business activities significantly, it also doubled the income of many farmers and provided the local economy with a new dynamism.
Companies should involve their local partners early on in their venture and look to co-design every aspect of the product or service, including its delivery. This will ensure that the product fits local expectations and effectively meets the real needs of its target audience. Local entrepreneurs will generally provide invaluable help and save companies from imposing their own pre-existing assumptions and biases.
Indian tobacco giant ITC successfully married hi-tech with traditional economic systems for its agricultural commodities business. ITC has bought soy from Indian farmers for years. It decided to create an e-choupal system of electronic meeting places in villages where farmers could access price information. Since the advent of the e-choupal, ITC has been able to buy soy crops at better prices while increasing the bargaining power of the farmers. These mini electronic centres have also created opportunities for other businesses and economic activities. There are now more than 4,000 e-choupals in rural India, and ITC is hoping to reach 100,000 villages over the next decade.
Companies will have to expand their conception of the global economy to include the four billion people at the base of the economic pyramid. Working with non-traditional partners, co-inventing solutions and building local capacity will help firms develop the capability in 'social embeddedness' that they will need to serve these markets effectively.
Embeddedness takes time to develop and cannot be quickly copied by competitors. Building this capability will give businesses an edge over rivals and a stronghold for future organic growth. But it requires companies to 'unlearn' how they do business, trust new and different local partners, and rethink how they gain local expertise.
Professor Ted London is a senior research fellow at the William Davidson Institute and on the faculty at the Ross School of Business, University of Michigan. Professor Stuart Hart is the Samuel C Johnson Chair in sustainable global enterprise at the SC Johnson Graduate School of Management, Cornell University
Reinventing strategies for emerging markets: beyond the transnational model, T London & SL Hart, Journal of International Business Studies, 35(5) 2004
Developing native capability, SL Hart & T London, Stanford Social Innovation Review, 3(2) 2005
Capitalism at the crossroads, SL Hart, Wharton School Publishing, 2005
The mystery of capital, Hernando de Soto, Basic Books, 2000
The fortune at the bottom of the pyramid, CK Prahalad, Wharton School Publishing, 2004
Unilever in India: rural marketing initiatives, 504-067-1, N Gayatri Devi, ICFAI Knowledge Centre, 2004
Cases Bahia: marketing to the poor, 505-039-1, K Aparna, V Gupta, ICFAI Centre for Management Research, 2005
Entrepreneurship in a harsh business climate: reform-era Vietnam, IB45, J McMillan, C Woodruff, E Yurday, Stanford University, 2003
Shanghai General Motors: the rise of a late-comer, 305-258-1, Z Tao, E Ho, Asia Case Research Centre, 2005
All cases available on www.ecch.com