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Going Native: Developing Trust, Social Capital Key to Corporate Longevity

8/22/2005 --

Ted London uncovers lessons at the 'Base of the Pyramid' for harnessing the economic power of a huge segment of the world's population.

ANN ARBOR, Mich.—Ted London, senior research fellow at the University of Michigan's William Davidson Institute and faculty member at the Ross School of Business, is shedding new light on the growth of multinational corporations in emerging markets.

In their article in the Stanford Social Innovation Review, "Developing Native Capability: What Multinational Corporations Can Learn from the Base of the Pyramid," London and colleague Stuart Hart of Cornell University say that corporations' quest for future growth should focus not only on market expansion aimed at the wealthy, but also on the much larger "base of the economic pyramid" (BOP)---the 4 billion to 5 billion people (two-thirds of humanity) who have been bypassed or damaged by globalization.

To reach this heretofore invisible segment, along with its massive potential market, multinational corporations (MNCs) must combine existing capabilities in technology development and global reach with a new localized understanding and radically different business models, says London, director of WDI's Base of the Pyramid Initiative.

For the past century, MNCs have focused on the very tip of the economic pyramid, the Tier 1 consumers or upper-income people in developed countries (the United States, Western Europe and Japan), London and Hart say. Recent forays into emerging markets of China, India and Latin America focused only on the wealthiest people, ignoring the vast majority of people considered too poor to be customers.

London and Hart find that stagnation of established markets and an anti-globalization sentiment is creating an attractive opportunity for serving the huge BOP market.

The base of the pyramid is also rich in assets, they say, though most are unregistered and therefore invisible. It is estimated that there are well over $9 trillion worth of unregistered assets in the rural villages and urban slums of the world, according to author Hernando de Soto in the "Mystery of Capital: Why Capitalism Triumphs in the West and Fails Everywhere Else."

It is likely that more than half of the total economic activity in the developing world takes place outside the formal economy, in the so-called informal or "extralegal" sector.

Serving the BOP also presents many unique challenges, as witnessed by Nike's failed attempt to introduce its "World Shoe" in this market, London and Hart say. Using low-cost materials and a cost-effective and sturdy design, the World Shoe team created a new product intended to appeal to the masses that could not afford Nike's top-of-the-line products. The company, however, ran into a variety of problems including using an existing manufacturing network that was incentivized to produce high end shoes for wealthy consumers, applying top of the pyramid gross margin requirements to a base of the pyramid product, and focusing distribution efforts on its current locations that already sold $150 shoes to upscale urban shoppers.

"Rather than relying on incremental modifications to its existing business model, Nike might have explored creative partnerships with local producers, potentially even including the counterfeiters that had been selling knock-offs of the company's high end products," said London, who also teaches a course "Business Strategies for the Base of the Pyramid" at the Ross School of Business.

"In addition to leveraging manufacturing and distribution expertise, this approach could have eliminated a fierce competitor and allowed the company to transfer its social and environmental practices to the local producers---a win-win for all involved. The result might have been a business model that competes based on social capital, quality and local value creation rather than trademark and legal protection."

Instead, the World Shoe project was shut down after failing to meet its sales targets.

The researchers say keys to creating native capability include:

  • Working with unconventional partners, while avoiding dependence on central institutions or corrupt regimes.

  • Developing a two-way information flow with those at the base of the pyramid and creating an environment that allows the co-invention of custom solutions.
  • Looking for new ways to compete based on a deep understanding of the local environment, such as building social, and not merely legal, contracts.

"In our study of BOP ventures, (we) discovered that successful initiatives—those that became embedded in the local community—maximized the functionality of the product or service in terms that were important to local users," said Hart, who along with C.K. Prahalad of the Ross School, first articulated how business could profitably serve the needs of the four billion poor in the developing world in a 2002 Harvard Business Review article titled "The Fortune at the Bottom of the Pyramid."

To address potential infrastructural shortcomings at the BOP, companies must come up with creative methods to help new economic activities blossom, the researchers say. Mobile phones, distributed energy sources and electronic information hubs run by select micro-entrepreneurs can level the playing field by leapfrogging the need for more traditional infrastructure and thereby open the possibilities for more growth.

"The time has come for MNCs to move beyond the traditional conception of transnational success," London said. "Developing native capability is one of the keys to creating a truly global enterprise."


Written by Nancy Davis

For more information, contact:
Bernie DeGroat
Phone:(734) 936-1015 or 647-1847
Email:bernied@umich.edu