Significant growth opportunities lie in second- and third-tier cities and rural areas. But although consumers there are some disposable income, they have limited resources. That’s forcing multinationals to rethink how they design products and services to reach them.
In 2005, the World Resources Institute’s Markets & Enterprise Program came up with the term “next billion” to identify the next billion people who would enter the middle class from the so-called “base of the economic pyramid” worldwide.
Of course, “next billion” also is short hand for the profits that can be made in coming up with business models that figure out how to integrate low-income consumers into formal economies (see NextBillion.net for more).
In their article “Mobilizing for Growth in Emerging Markets” in the Spring 2012 issue of MIT Sloan Management Review, authors Navi Radjou and Jaideep Prabhu detail how multinational companies need to approach this massive market by creating networks of local partners. Here are statistical and thematic highlights from their article:
- “Between 2003 and 2007, multinationals established more than 1,100 R&D centers in India and China, investing a total of $24 billion.”
- “More and more products and services marketed by multinationals in emerging markets — such as General Motors’ Buick LaCrosse in China and Johnson & Johnson’s reusable surgical stapler in India — are being redesigned or entirely built from scratch using local R&D talent.”
- “Many multinationals that rely on ‘value chain localization’ still focus on affluent, urban customers rather than the much larger population of urban and rural poor. This strategy does not adequately prepare them for the far greater challenge (and opportunity) of reaching the urban and rural poor.”
- “Significantly greater growth opportunities lie in second- and third-tier cities and rural areas. Indeed, almost 70% of India’s 1.2 billion people live in rural areas, and only an estimated 23% of the rural population has cell phones.”
- “Although ‘next billion’ consumers increasingly have more disposable income and want more, they nevertheless have limited resources. The juxtaposition of high aspirations and resource constraints forces multinationals to rethink how they design products and services to reach such consumers.”
- “Understanding the unique preferences and buying behaviors of these consumers often requires expertise or knowledge that multinationals lack but that may reside with other local actors such as government institutions or nongovernmental organizations.”
- “Even if multinationals succeed in designing affordable products for “next billion” consumers, they also need to figure out how to distribute these products to people in locations that are hard to reach; India, for example, has 600,000 villages.”
- “Partnering with local actors with infrastructure to facilitate delivery in an affordable and effective manner — whether they are public institutions or NGOs — is absolutely crucial.”
The authors conclude that building and managing partner networks are easier said than done. Four recommendations:
- Extend innovation partnerships beyond the usual suspects.
- Engage innovation partners strategically with a larger purpose.
- Trust but verify in a transparent manner.
- Assign partner network managers.
For more details and examples of how Xerox, GE Healthcare and Nokia are working to ride the wave of growth in emerging markets, see the full article, “Mobilizing for Growth in Emerging Markets.”