Strategy for the Base of the Pyramid

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. 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 happy 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 great leap downward. The million (or billion)
dollar question is: How?
Case Discussion Questions

1. What are the more attractive industries for the base of the pyramid?
2. From a resource-based view, what determines firm performance in emerging economies?
3. From an institution-based view, what are the crucial differences in formal and informal rules of
the game between developed and emerging economies?
4. Some argue that aggressively investing in emerging economies is not only economically
beneficial but also highly ethical, because it may potentially lift many people out of poverty.
However, others caution that in the absence of reasonable hopes of decent profits (the base of the
pyramid is notoriously turbulent due to political and economic uncertainties), rushing to emerging
economies is reckless. How would you participate in this debate?