Magazine Fall 2007 Research Feature

Strategic Innovation at the Base of the Pyramid

Innovation in developing markets has less to do with finding new customers than addressing issues of product acceptability, affordability, availability and awareness.

Jamie Anderson and Costas Markides Reading Time: 16 min 

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Companies that develop new strategies to attack competitors and enter new markets often accomplish this by introducing architectural or business-model breakthroughs. They identify gaps in how an industry is organized, go after those gaps and then find ways to turn them into profitable markets. They find new customers (“new whos”), new products or services (“new whats”) or new ways of promoting, producing or distributing them (“new hows”). Although there has been a burst of interest in recent years in how economic growth is unfolding in the developing world, most of the research on strategic innovation is focused on developed markets. However, based on our research, that understand the dynamics of growth at the base of the economic pyramid in emerging markets have significant opportunities to unlock value.

We have studied strategic innovators in developing markets from a variety of industries to understand the reasons behind their success, and to explore how the success factors differed from what we have observed about innovators in the developed world. (See “About the Research,.”) We found that strategic innovation in developing markets differs in three important ways. First, the issue is not finding “new whos”— indeed, assuming products are affordable, there are plenty of under- and nonconsuming customers to tap. Second, it is not about creating new product features but adapting existing products to customers who have fewer resources or a different cultural background. And third, it is less about creating new business models or differentiating how you compete than establishing basic market ingredients such as distribution channels and customer demand from the ground up. Companies that are able to confront theses issues have often been able to achieve strong market share and profit growth.

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About the Authors

Jamie Anderson is a senior lecturer and member of the founding faculty at the European School of Management and Technology, in Berlin. Costas Markides is the Robert P. Bauman Professor of Strategic Leadership at London Business School.

References

1. C.K. Prahalad and S.L. Hart, “The Fortune at the Bottom of the Pyramid,” Strategy+Business 26, no. 1 (2002): 2–14.

2. C.K. Prahalad and A. Hammond, “Selling to the Poor,” Foreign Policy (May–June 2004): 30–37.

3. P. Kashyap and S. Raut, “The Rural Marketing Book (Text/Practice)” (New Delhi: DreamTech Press, 2006).

4. R.V. Pandit, “What’s Next for Tata Group: An Interview With Its Chairman,” McKinsey Quarterly 4 (2005): 60–69.

5. L.S. Paine and R.J. Crawford, “The Haier Group (A),” Harvard Business School case no. 9-398-101 (Boston: Harvard Business School Publishing, 1998).

6. P. Balakrishna and B. Sidharth, “Selling in Rural India,” Hindu Business Line, Feb. 16, 2004.

7. J. Franklin, “Paddling for Profits: Despite Hard Times, Avon’s Huge, Mostly Female Workforce Is on the Move in Latin America,” Latin Trade (December 2003).

8. For a good discussion of Hindustan Unilever’s use of street performances, see R. Balu, “Strategic Innovation: Hindustan Lever Ltd.,” Fast Company Online, no. 47 (May 2001): 120. For more detailed information on the company’s strategy in the detergent market, see P.H. Werhane, M.E. Gorman and J. Mead, “Hindustan Lever Limited (HLL) and Project STING (B),” Darden Business Publishing case no. UVA-E-0267 (Charlottesville, Virginia: University of Virginia Darden Business Publishing, 2004). For a wider discussion of the fast moving consumer goods industry in India, see A.N. Radhika, “Changing Trends in Retailing and FMCG Industry in India,” ICFAI Center for Management Research minicase no. CLBS019 (Hyderabad, India: ICFAI Center for Management Research, 2004).

9. The market capitalization of Philippine Long Distance Telephone Co., Smart Communications Inc.’s parent, increased from U.S. $3.048 billion on December 31, 2003, to U.S. $9.489 billion on December 31, 2006.

i. A.M. Pettigrew, “Longitudinal Field Research on Change: Theory and Practice,” Organizational Science 1, no. 3 (1990): 267-292.

ii. R.K. Yin, “Case Study Research: Design and Methods Revised,” 3rd ed. (London: Sage, 2004).

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Comment (1)
Dinesh Kumar
As rural marketing models of many companies do not succeed, companies have to implement innovative models. The first step would be finding talent to work in BOP markets, as city-educated youths do not want to work in such markets. Much of the research  is also done without leaving cities. That is why this is valuable research indeed.