MNCs Serving the Needs of Customers at the Bottom of the Economic Pyramid
Multinational Corporations’ Marketing & Selling Strategies
Across the Economic Spectrum
The emphasis on how to create a profitable business model for those countries and entire regions of the world with per capita incomes below $10,000 a year is typically referred to as marketing to the Bottom of the Pyramid (BOP). There are several thought leaders who have intensively the business and market development, pricing, product development and services in nations and regions of the world who have low per capita incomes. The foremost expert in this field was the late C.K. Prahalad, who was the most prolific researcher and writer of many of the experts and thought leaders covering this area of global commerce (Prahalad, 2004). In striving to create business models for the BOP nations and regions of the world, C.K. Prahalad and others found that the critical success factors that multinational corporations (MNCs) can use to better serve customers in this market include using Corporate Social Responsibility (CSR)-based strategies and initiatives; support for direct Foreign Direct Investment (FDI); the ability to tailor not only products but also the processes that deliver product design, services and support; and a willingness to create a more unified, locally-focused supply chain (Gouillart, 2008). These four factors are what differentiate the companies that attempt to capitalize on the massive amount of growth in the BOP-based nations and regions of the world relative to those that succeed. (Varadarajan, 2009). One of the main take-aways of the research completed for this analysis is the critically important role the attitudes and beliefs of governments are to Foreign Direct Investment (FDI), the ability these governments to nurture and foster investment in infrastructure in conjunction with partners, and the presence of advanced learning & Research & Development (R&D) centers including university research (Gouillart, 2008) (Kennedy, 2004). All three of these factors also emerged as the catalyst of BOP growth and market formation in the extensive research Dr. Prahalad completed in his native country of India, and also through the Asian region (Prahalad, 2004).
Strategies Multinational Corporations Use for Penetrating Emerging Markets at the Bottom of the Economic Pyramid
Starting with the integration of new business initiatives into the structure of CSR initiatives and programs, studies of the last five years of successful and unsuccessful programs in India, China and throughout Asia by Proctor & Gamble, Uniliever, PepsiCo and others show that this is the single greatest factor in their successful entrance into new markets (Prahalad, 2004). The discipline of creating a CSR-based framework for each product or service forces companies to have a much more accurate, clearer and tighter analysis of market requirements than would otherwise the case (Kennedy, 2004). In higher-end markets where the per capita incomes are comparable to the most affluent areas of Australia, Europe and the United States this level of discipline in terms of a company’s contributions is not required. There is even less risk mitigation strategies taken on in these market given the pricing economics and the ability of these companies to quickly move products into alternative, and often lower-priced distribution channels. More affluent markets tend to also nurture more of a complacency about the hard work of designing products to the specific needs of a given economic and social strata of a market (Prahalad, 2004). It is therefore easier to design, product, launch and sell products that don’t reflect the unique market constraints of a given market. All of this complacency is what leads to product strategies that fail to reflect user requirements, and this often hastens price inelasticity and competition, and the consolidation of market segments.
Paradoxically the MNCs that are achieving the greatest results in their new venture strategies and initiatives in BOP nations and regions have used CSR frameworks as a means to unify their value chains while ensuring a highly accurate definition of market requirements. The growing success rates of rural-based product and services strategies in India is in large part due to the supply chain, product design, development, services and support programs designed for water purification systems, low-priced cosmetics and healthcare products shows how critical CSR frameworks are as market listening platforms (Chattopadhyay, Sarkar, 2011).
The second critical success factor is the role of the BOP nations and regions with regard to their willingness to invite or at least tolerate direct Foreign Direct Investment (FDI). This is a critical success factor in that it defines the overall structure of investments and the level of transparency that MNCs must deliver to these nations and their ministries or government agencies. While BOP-based nations are by nature distrustful of FDI as they see it as a means for MNCs to get control of their economies, there are unintended benefits of the transparency that MNCs must abide by. One of the most critical is the ability to translate the FDI reporting requirements into creating a more effective Joint Venture (JV) strategy that can also act as a catalyst of new venture growth. Many nations and regions who are classified as being part of the BOP-based regions of the world are using the disclosures of FDI to also drive joint venture creation with their own firms, in addition with other globally-based firms. The use of FDI disclosure to drive greater investment based on knowledge workflows is crucial for the overall organization of local economics, even in socialist-leaning governments as several BOP-based nations are (Varadarajan, 2009). Direct FDI strategies also force a very high level of timeliness and visibility into the product development, supply chain management and new venture development strategies of MNCs. This level of accountability is critically important to keep projects on schedule over time, and works to also level set expectations regarding the timeframes of project milestones. The incidental value of this reporting and transparency of direct FDI is to create a higher level of urgency on the part of MNCs in completing their initiatives and projects on time (Gouillart, 2008).
The third most critical success factor is the development of localized supply chains that serve to anchor MNC product and service strategies in the BOP-based regions and nations, while also providing a means to listen to customer requirements. The late C.K. Prahalad believed that the extent to which a supply chain could serve as a catalyst of continued innovation in BOP-based regions of the world is the extent to which they could also be sources of innovation and growth (Gouillart, 2008). Researchers also have shown how critical the development of localized supply chains are to the overall success of MNCs in launching new business initiatives in BOP-based nations by showing how the activities of validating suppliers forces greater focus on quality management (Kennedy, 2004) (Varadarajan, 2009). The one failure point of any strategy of creating products or services for BOP regions and nations is the lack of focus on quality that drives up sourcing, production and services costs (Gouillart, 2008). By concentrating on the development and continual creation of local supply chains, MNCs alos discover more about their own strengths in a given BOP-based region and also see how they can best deliver value to customers in the region (Chattopadhyay, Sarkar, 2011). The act of gaining suppliers for a low-priced product, often designed to better the lives of those in the BOP-based country, also force a more focused strategy of continual process improvement as well (Gouillart, 2008). In the case of SABMiller and their local breweries throughout third-world nations, the decision to create an entirely sustainable and local suppliers gave them insights into areas of their processes they could automated and make more efficient in the more affluent regions of the world. This is consistent with MNCs who originally seek to reduce costs of acquisition by creating a local supply chain, only to find out that the process of achieving this opens up a significant level of insight and innovation in how to create more value worldwide (Chattopadhyay, Sarkar, 2011) (Prahalad, 2004). The localized supply chains are also critically important for better understanding how market requirements change over time in BOP-based regions and nations of the world. The many steps required to create an effective supply chain in a given BOP-based region differ drastically from creating one in a more affluent region of the world. The focus on speed and transactions and the ability to increase velocity is the priority in these markets. In BOP-based nations the perspective shifts to understanding the dynamics of the market first, and then using these insights to create local competitive advantage. These lessons learned, specifically in the case of SABMiller and others lead to a more effective supply chain formation, management and optimization strategy over the long-term.
Conclusion
Creating and executing effective Corporate Social Responsibility (CSR) programs that serve as market frameworks, defining and executing more effective direct Foreign Direct Investment (FDI) strategies with host nations and creating more effective and focused supply chains on a local basis are all critically important success factors for MNCs opening new markets. These factors are also critically important in more affluent nations, yet the lessons learned in penetrating new regions in BOP-based nations and regions of the world show significant potential to re-order overall growth. The shift away from creating products just for affluent nations to those in the lower economic regions of the world is bringing a level of clarity and discipline to core value chain processes that would not have been achieved otherwise.
Bibliography
Chattopadhyay, Subho and a.K. Sarkar. 2011. “Market-Driven Innovation for Rural Penetration.” IUP Journal of Business Strategy 8 (3): 42-52.
Gouillart, Emily. 2008. “An Interview with C.K. Prahalad.” Journal of International Affairs 62 (1): 215-227.
Kennedy, Carol. 2004. “The Fortune at the Bottom of the Pyramid.” Director, 36-36.
Prahalad, C.K. 2004. “Why Selling to the Poor Makes for Good Business.” Fortune, Nov 15, 70-72.
Varadarajan, Rajan. 2009. “Fortune at the Bottom of the Innovation Pyramid: The Strategic Logic of Incremental Innovations.” Business Horizons 52 (1): 21..
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