Transcript Document

Global Economic
Crisis and the
Emerging Markets
Jonathan Doh
Manny Nunez
Jonathan P. Doh
July 6, 2009
Outline of our Session
Key global trends
and the rise
of emerging
markets
Emerging markets
business systems
and relationships
Emerging
markets as
laboratories
of innovation
Emerging markets
and the
economic crisis
Is the world flat?
1.
2.
3.
4.
5.
6.
7.
8.
9.
10.
11/9/89: when the walls came
down and the windows went up
8/9/95: when Netscape went public
Workflow Software: let’s do lunch –
have your application talk to my
application
Open sourcing: self-organizing
collaborative communities
Outsourcing: Y2K
Offshoring: running with gazelles,
eating with lions
Supply-chaining: eating sushi in
Arkansas
In-sourcing: what the guys in funny
brown shirts are really doing
Informing: Google, Yahoo!, MSN
Web Search
The Steroids: digital, mobile,
personal, and virtual (…wireless the
icing on the cake)
>3
A “spiky”world: population
>4
A “spiky”world: economic activity
>5
A “spiky”world: innovation
>6
Reflection question
• From your perspective, is the world:
• Round?
• Flat?
• Spiky?
>7
Changing balance of economic power
Shift in World GDP
2005 % World GDP
4%2%
6%
21%
8%
3%
21%
35%
US
Asia
Latin America
Sub-Saharan Africa
EU
Russia
Middle East and North Africa
Other
Source: Economist Intelligence Unit.
>8
Changing balance of economic power
Shift in World GDP
2010 % World GDP
4%
2%
8%
3%
20%
3%
20%
40%
US
Asia
Latin America
Sub-Saharan Africa
EU
Russia
Middle East and North Africa
Other
Source: Economist Intelligence Unit.
>9
Changing balance of economic power
Shift in World GDP
5%
2020 % World GDP
2% 3%
8%
18%
3%
19%
42%
US
Asia
Latin America
Sub-Saharan Africa
EU
Russia
Middle East and North Africa
Other
Source: Economist Intelligence Unit.
>10
Changing balance of economic power
At present, U.S. by far largest GDP
2005 GDP (US $bn at PPP)
14000
12000
10000
8000
6000
4000
2000
0
United States
China
Japan
India
Germany
United
Kingdom
Source: Economist Intelligence Unit.
>11
Changing balance of economic power
China surpasses U.S. in 2020 (ppp basis)
GDP 2020 (US$bn at PPP)
30,000
25,000
20,000
15,000
10,000
5,000
0
United States
China
Japan
India
Germany
United
Kingdom
Source: Economist Intelligence Unit.
>12
Relative size of Big 4 economies
market exchange rates
Constant 2004 US $bn
40000
35000
30000
US
China
India
Japan
25000
20000
15000
10000
5000
>13
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
2009
2006
0
Relative size of Big 4 economies
PPP exchange rates
Constant 2004 US $bn at PPPs
60000
50000
40000
US
China
India
Japan
30000
20000
10000
>14
2048
2045
2042
2039
2036
2033
2030
2027
2024
2021
2018
2015
2012
2009
2006
0
Changing balance of economic power
China and India propel growth in Asia
Contribution to Global Growth (2006-2020, %)
30
26.7
25
20
15.9
12.2
15
10
2.4
5
2.3
2.3
2.1
1.9
0
China
U.S.
India
Brazil
Russia Indonesia
South
Korea
U.K.
Source: Economist Intelligence Unit.
>15
Changing balance of economic power
Greater Asia will generate 67% of global jobs 2005-20
New Jobs in the World Economy (% of world net
increase 2005-20)
3%
19%
2%
10%
14%
23%
29%
U.S.
EU25
Latin America
China
India
Other Asia
Other
Source: Economist Intelligence Unit.
>16
Changing balance of economic power
High (but slowing) GDP growth in China…
Real GDP Growth (% )
8
7.6
7
6
6
5
4.5
5
4
3.8
4
3
2.8
2.2
2.1
2.2
2.5
China
3.8
2.7
3.4
2.7
2.6
2.8 2.6
2
1
0
2005-10
>17
2010-15
2015-20
2020-25
2025-30
2030-35
2035-40
2040-45
2045-50
U.S.
Changing balance of economic power
…Makes China largest (absolute) economic power by 2040
China vs. U.S.: GDP
60000
50000
2040-2045
40000
China
30000
U.S.
20000
10000
0
2005 2010 2015 2020 2025 2030 2035 2040 2045 2050
>18
Changing balance of economic power
But growth is uneven
Rural and urban real incomes in China,
1990=100
350
300
250
200
Rural
150
Urban
100
50
0
1990 1992 1994 1996 1998 2000 2002 2004
>19
Emerging countries’ share of GDP
Emerging and developing countries' share of
world GDP
49.00
47.00
45.00
43.00
41.00
39.00
37.00
35.00
Y1994 Y1995 Y1996 Y1997 Y1998 Y1999 Y2000 Y2001 Y2002 Y2003 Y2004 Y2005 Y2006 Y2007 Y2008 Y2009
% of world total, calculated at PPP exchange rates
>20
Changing global demographics
The global
population is aging
Sourc
30%
25%
26%
Percent of Population
Aged 65 & Over:
History and UN Projection
25%
23%
19%
20%
16%
15%
14%
15%
12%
13%
13%
10%
10%
5%
8%
4%
10%
9%
4%
8%
4%
4%
4%
5%
6%
0%
1950
1970
1990
Developed World
Source: UN (2005)
>21
2010
2030
Developing World
2050
Changing global demographics
Lifetime Births per Woman
Fertility rates falling below replacement in G-7
4.0
3.5
3.3
Total Fertility Rate,
2.9
3.0
2.5
3.6
2.1
2.8
2.0
2.0
1.9
2.0
1.7
1.5
1.5
1.3
1.0
0.5
0.0
1960-1965
Source: UN (2005)
>22
2.5
2.5
2000-2005
1.3
1.3
Changing global demographics
Life expectancy growing in G-7
85
81.9
Life Expectancy at Birth, by Country
80
78.3
77.3
79.4
78.6
79.7
80.0
Years
75
70
68.9
69.2
69.1
67.5
66.5
66.0
63.9
65
60
US
UK
Germany
France
1950-1955
Source: UN (2005)
>23
Canada
2000-2005
Italy
Japan
Changing global demographics
Some G-7 aging faster than others
39%
40%
35%
39%
Percent of the Population
Aged 65 or Over, by Country
31%
30%
27%
24%
25%
20%
20%
19%
20%
20%
16%
16%
15%
27%
13%
12%
10%
5%
0%
US
Source: UN (2005)
>24
UK
Canada
2005
France
2050
Germany
Italy
Japan
Inversion of age pyramid
1960 Distribution in Developed World
100+
Men
Women
90-94
80-84
Year:
1960
70-74
60-64
50-54
40-44
30-34
20-24
10-14
0-4
50000
40000
>25
30000
20000
10000
0
10000
20000
30000
40000
50000
Median Age:
29.6
Inversion of age pyramid
2050 Distribution in Developed World
100+
Men
Women
90-94
80-84
Year:
2050
70-74
60-64
50-54
40-44
30-34
20-24
10-14
0-4
50000
40000
>26
30000
20000
10000
0
10000
20000
30000
40000
50000
Median Age:
46.4
Changing global demographics
Developing countries on the rise
12 Largest Countries Ranked by Population
1
2
3
4
5
6
7
8
9
10
11
12
>27
1950
2000
2050
China
Soviet Union
India
United States
Japan
Indonesia
Germany
Brazil
United Kingdom
Italy
France
Bangladesh
China
India
United States
Indonesia
Brazil
Russian Fed.
Pakistan
Bangladesh
Japan
Nigeria
Mexico
Germany
India
China
United States
Pakistan
Indonesia
Nigeria
Bangladesh
Brazil
Congo
Ethiopia
Mexico
Philippines
Source: UNDP (2005)
Global trends in health care
Medical tourism on the rise
 In 2008 Deloitte found that
"medical tourism" is a hot
trend among U.S. health care
consumers
 Nearly 40 % said they
would travel outside the
country for medical treatment,
if the quality was comparable
and the cost was cut in half
 Market drivers for medical
tourism:
•Cost savings;
•Comparable or better quality
health care;
•Shorter waiting periods thus
quicker access to care
 World medical tourism
market is estimated to have
reached $60 billion in 2008,
and grow to $100 billion by
2010. Over 35 countries are
serving around 1 million
medical tourists annually
Medical Tourism Video
>28
Assumptions:
• In 2007, approximately 750,000 Americans traveled outbound for medical care.
That number will increase to 6 million by 2010. Therefore the growth rate from
2007 to 2010 is 100% for the base estimate.
• After 2010, the growth rate will begin to fall due to supply capacity constraints in
foreign countries.
• Upper/Lower bound estimates assume the growth rate is higher/lower than the
base case estimate.
•Source: 2008 Deloitte Development LLC
Global trends in health care
Medical tourism on the rise
>29
Reflection question
• Which aspects of the key global trends outlined
here do you believe are the most meaningful and
long-lasting?
• Which aspects of the demographic trends are
most profound?
• Do you believe the projections re: growth of
global health care tourism are realistic?
Emerging markets essentials
1. What is an emerging market?
2. What are these markets emerging from?
3. What are these markets emerging to?
4. What signals help identify a country as
emerging?
5. What signals suggest a country is submerging?
>31
Emerging market: one definition
•
Gross National Income (GNI)/capita (US$):
$1,001 (Lower) to $9,999 (Upper)
Definition
Excludes countries:
>$10,000 GNI/capita – deemed developed market
<$1,000 GNI/capita – deemed GAVI/developing market
•
•
Rationale
Source: World Bank
World Bank definition of GNI:
Used 3-year average of exchange rates to ‘smooth’ out annual
fluctuations due to policies and interventions
Classified countries in low-, middle- and high-income categories
•
>32
Source: World Bank
Developing countries v. emerging markets
Emerging Markets
(Since 2000)
Developing Countries
(prior to 2000)
•
High risk for foreign investors
•
Risks increasingly manageable
•
Economically underdeveloped
•
•
Technologically inferior
Faster income growth than
developed countries
•
Low purchasing power
•
Technologically competitive
•
Host government restrictions
•
Increasing purchasing power
•
Few significant opportunities
for foreign business
•
Host government liberalization
•
Greater opportunities for
foreign business: BOP, OS
>33
My perspective on emerging markets
• Developing countries “on the move”
• Consistent pattern of policy reform
• Privatisation (e.g. sale of SOEs)
• Market liberalisation (e.g. trade, regulatory)
• Monetary and Fiscal policy (independent Central Bank;
efficient tax system)
• Resultant record of sustainable growth
• Faster than average annual growth
• Growth in private (often foreign) capital)
• Increased trade and FDI
• Sustained social progress
• Improved education, health care, etc
>34
Types of emerging markets
• BRIC: Big emerging markets
• China and India: “Giants”
• Others: Brazil, Russia, Mexico
• “Second tier” but coming on fast
• Vietnam, Indonesia, Malaysia, Thailand
• “Graduates”
• South Korea, Taiwan, Singapore?
• “Transition” economies
• Poland, Russia, Hungary
• “Other”
• Turkey, Middle East economies
>35
BRIC Economies
(Brazil, Russia, India, China + Mexico?)
• Fastest growing, dynamic, highest potential EMs
• Leaders in respective regions
• Between 2000-2007, contributed 28% of global growth
• More than 15% of global FDI and trade; 30% FX
reserves
• China overtakes US by 2040; India beats Japan by 2033
• Significant similarities among each
• All faced substantial acceleration in growth, democratic
political reform, market-oriented reforms manifest in
FDI and some macroeconomic and reform setbacks
• Substantial differences as well
• Each has had difference experience in pace, breadth,
depth of reform, with some now experiencing some
backtracking in their commitment to pol/econ reform
>36
Outline of our Session
Key global trends
and the rise
of emerging
markets
Emerging markets
business systems
and relationships
Emerging
markets as
laboratories
of innovation
Emerging markets
and the
economic crisis
Emerging markets: Institutional systems
1. Institutional systems are a critical and
overlooked variable in global markets
2. Different countries look differently
across these measures
3. Important implications for strategy
>38
Institutional systems:
Political/social systems
• Political Accountability: free/fair elections
• Political Accountability: independent judiciary
• Government regulatory interference
• Protection of private property rights
• Independence of quasi-judiciary agencies
• Religious, linguistic, ethnic, geographic
tensions
• Civil society and NGOs and Corruption
• Development/independent finance regulator
Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June
>39
Institutional systems:
Openness
• Receptivity to/restrictions on FDI
• Local content/ownership requirements?
• Presence/quality of foreign intermediaries
• Support/constraints to new venture
development
• Restrictions on portfolio investment/FX
• Import tariffs on intermediate/capital goods
• Participation in FTAs/EIAs
• Free flow of executives in/out of country
• Financial liberalization (WTO/unilateral)
Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June
>40
Institutional systems:
Product markets/distribution
• Development of transportation infrastructure
• Development of distribution systems/networks
• Existence and sophistication of market research
• Availability of raw materials/dependability of
suppliers
• Government restrictions on FDI
• Nature/quality of retail/credit system
• Consumer receptivity to new products/services
• Ability to develop network of branches or other
financial distribution systems
Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June
>41
Institutional systems:
Labor markets
• Educational Development
• Employee mobility
• Quality of training/management development
• Pay/performance and motivation
• Receptivity to foreign managers
• Laws and regulations on labor reduction
• Consumer receptivity to new products/services
• Ability to deploy foreign nationals and hire/fire
local employees
Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June
>42
Institutional systems:
Capital markets
• Development of banking/insurance/ securities
• Ownership/transparency of institutions
• Sophistication/liquidity of debt/equity markets
• Reliability/quality of information on markets
• Corporate governance/board independence
• Regulatory effectiveness
• Takeover/bankruptcy laws
Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June
>43
Emerging market institutions:
Shape, adapt, or withdraw?
• Shape: Institutional system in flux may be
subject to shaping (China/financial services,
health care?)
• Adapt: Established and well-developed
institutional system suggests adaptation (Chile,
telecom)
• Withdraw: Inferior and unpredictable
institutional system suggests withdrawal
(Venezuela, Bolivia oil and gas)
Source: Khanna, T., Palepu, K., & Sinha, J. 2005. Strategies to fit Emerging Markets. Harvard Business Review, June
>44
Reflection Question
• Which institutional category is most important for
the industry or area you cover?
• Which specific aspect of that institutional
category is most important?
• Can you think of a specific example of how a firm
“shaped” and emerging markets institutional
environment?
Global-local relationships
• Global companies seek partners with local
knowledge, distribution, government connections
• Local companies seek avenues into global
economy and seek foreign partners with
technology, managerial expertise, brand
• Local governments seek relationships that
capture employment, technology and other
direct/indirect benefits and often serve as
intermediaries
Adapted from authors’ reseearch and Adarkar, A., Adil, A., Ernst, D., and Vaish, P.
Emerging market alliances: Must they be win-lose? McKinsey Quarterly, 4: 120–137.
>46
Four possible outcomes of Global-local alliance
Sustainable
Power
balance
Power shift
toward local
partner
Initial
alliance
Power
collision
>47
Power shift
toward global
partner
Global-local relationships:
Hofstede’s Cultural Dimensions
Power
Distance
• Extent to which less powerful members of
institutions and organisations accept that
power is distributed unequally
• High power distance countries: people blindly
obey orders of superiors, centralised
organisation structures
• Low power distance countries: flatter and
decentralised organisation structures, smaller
ratio of supervisors
Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors,
institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage.
>48
Global-local relationships:
Hofstede’s Cultural Dimensions
Power
Distance
Uncertainty
Avoidance
• Extent to which people feel threatened by
ambiguous situations and have created
institutions to avoid such situations
• High uncertainty avoidance countries: people
have high need for security, structured
organisational activities, more written rules,
less risk taking
• Low uncertainty avoidance countries: more
willing to accept risks associated with
unknown, less structured organisational
activities, fewer written rules, more risk taking
by managers
Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors,
institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage.
>49
Global-local relationships:
Hofstede’s Cultural Dimensions
• Individualism: Tendency of people to look
Power
after themselves/family
Distance
Uncertainty
Avoidance
Individualism/
Collectivism
• Countries high in individualism: support work
ethic, greater individual initiative, merit
promotions
• Collectivism: Tendency of people to belong to
groups or collectives and to look after each
other
• Countries high in collectivism: less support of
work ethic, less individual initiative, seniority
promotions
Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors,
institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage.
>50
Global-local relationships:
Hofstede’s Cultural Dimensions
• Masculinity: dominant social values are
Power
success, money, things
Distance
Uncertainty
Avoidance
• Countries high in masculinity: great
importance on earnings, recognition,
advancement, challenge, and wealth.
Individualism/
Collectivism
• Femininity: a culture in which the dominate
social values are caring for others and the
quality of life
Masculinity/
Femininity
• Countries high in femininity: importance on
cooperation, group decision, employment
security.
Adapted from Hofstede, G. H. 2001. Culture’s consequences: Comparing values, behaviors,
institutions, and organizations across nations, 2nd ed. Thousand Oaks, CA: Sage.
>51
Cultural rankings of emerging markets, US and EU
Power
Distance
Uncertainty
Avoidance
Individualism
(Collectivism)
Masculinity
China
80
40
20
66
Philippines
94
44
32
64
Malaysia
104
36
26
50
India
77
40
48
56
Czech Republic
57
74
58
57
Hungary
46
82
55
88
Poland
68
93
60
64
Slovakia
57
74
58
57
Mexico
81
82
38
69
Brazil
69
76
38
49
South Africa
49
49
65
63
US
40
46
91
62
EU (avg)
45
74
61
59
>52
Outline of our Session
Key global trends
and the rise
of emerging
markets
Emerging markets
business systems
and relationships
Emerging
markets as
laboratories
of innovation
Emerging markets
and the
economic crisis
Global pushback against business
>54
Global pushback against business
• Prior to crisis, some developing/emerging
markets questioning Western economic models
(“Washington consensus)
• Trend especially apparent in Latin America
(Venezuala, Ecuador and Bolivia)
• China, others blame crisis on U.S. and capital
markets model of finance
• In general, however, emerging markets doing
better than developed countries throughout crisis
with some exceptions (Central/Eastern Europe)
>55
In U.S., trust in business at lowest level
including post-Enron
60%
58%
US
20
point
drop
UK/France/Germany
55%
53%
51%
50%
45%
Enron, the dot-com
bust and September
11
44%
48%
48%
49%
44%
41%
40%
40%
38%
35%
36%
35%
36%
34%
U.S. is the new
Europe
32%
30%
2001
2002
Source: Edelman Trust Barometer 2009
56
38%
36%
2003
2004
2005
2006
2007
2008
2009
Trust in leaders
NGO leaders
52
Leaders at the U.N.
42
Spiritual/religious leaders
41
Leaders of Western Europe
36
Managers of global economy
36
Managers of national economy
35
Executives of MNCs
33
27
Leaders of the U.S.A.
0
10 20 30 40 50 60
Percentage Saying “A Lot” and “Some Trust”
Average Across All Countries Surveyed
Trust in Leaders: Percentage Saying “A Lot” and “Some Trust”
Source: Edelman Trust Barometer 2009
>57
Technology most trusted industry sector globally
Source: Edelman Trust Barometer 2009
58
Global economic crisis indicators
2009 down turn in world
GDP and trade
Global growth est. cut by 2.6%
points by World bank March 2009
vs. November 2008 forecast
Global Economic Prospects 2009 Forecast Update, World Bank, March 30, 2009,
http://siteresources.worldbank.org/INTGEP2009/Resources/5530448-1238466339289/GEPUpdate-March30.pdf
>59
Real GDP growth forecast (March 2009)
(percent change from previous year)
Source: World Bank.
Notes: a: GDP in 2000 constant dollars, 2000 prices and market exchange rates. b: GDP measured at 2000 PPP weights. c. GDP figures for
South Asia refer to fiscal years (FY). The FY runs from Jul-1 through Jun-30 in Pakistan and Bangladesh; and from Apr-1 through Mar-31 in
India. Due to reporting practices, where FY2007/08 is reported in 2008 for Pakistan and Bangladesh and in 2007 for India, there is an
illusion of a lag in the impact of the global crisis upon Pakistan and Bangladesh compared with India.
>60
Global economic crisis indicators
 Global GDP estimated to
have fallen by 5 percent in the
fourth quarter (annualized),
led by advanced economies,
which contracted by 7 percent.
 GDP declined in the fourth
quarter by around 6 percent in
both the U.S. and Euro area,
plummeted at a post-war
record of13 percent in Japan.
 Growth also plunged across
a broad swath of emerging
economies, reflecting the
confluence of weakening
external demand, tightening
financing constraints, and
plunging commodity prices.
>61
Source: IMF Report: Global Economic Policies and Prospects, Group of
Twenty Meeting of the Ministers and Central Bank Governors, March
13–14, 2009, London, U.K.
Vulnerabilities of European banks with substantial
exposures to Central/Eastern Europe
The vulnerabilities of banks
with substantial
exposures to Central and
Eastern Europe are raising
perceptions of sovereign
risk in advanced
economies. Many banks’
exposures are high
relative to their home
country GDP. Austrian
banks’ exposures, for
example, amount to
about 75 percent of
Austria’s GDP.
Other countries with
relatively high exposures
to emerging Europe
include Switzerland,
Belgium, the Netherlands,
and Sweden.
Source: IMF Report: Global Economic Policies and Prospects,
Group of Twenty Meeting of the Ministers and Central Bank
Governors, March 13–14, 2009, London, U.K.
Vulnerability indicators by region
Current account balance
Over the past few
years, current account
balances have become
more divergent.
Emerging Europe has
seen large and
sustained deficits, while
many countries in Asia,
the Middle East, and the
Commonwealth of
Independent States
(CIS) have shifted to
surpluses— partly
because of the
commodity price boom.
Source: IMF, World Economic Outlook (WEO), April 2009,
http://www.imf.org/external/pubs/ft/weo/2009/01/index.htm
Economic Indicators
Retail Sales
Source: IMF Report: Global Economic Policies and Prospects, Group of Twenty Meeting of the
Ministers and Central Bank Governors, March 13–14, 2009, London, U.K.
Economic Indicators
Commodity Prices and Inflation
Source: IMF Report: Global Economic Policies and Prospects, Group of Twenty Meeting of the
Ministers and Central Bank Governors, March 13–14, 2009, London, U.K.
The Collapse Of Emerging-Market Currencies
Council on Foreign Relations (CFR), Lessons of the Financial Crisis, Council Special Report No. 45, March
2009, http://www.cfr.org/publication/by_type/special_report.html
iShares MSCI Emerging Markets Index ETF
(historical data for 1 yr prior to May 18, 2009)
Source: iShares MSCI Emerging Markets Index ETF, MarketWatch, 19 May 2009,
http://www.marketwatch.com/investing/fund/EEM/charts
Outline of our Session
Key global trends
and the rise
of emerging
markets
Emerging markets
business systems
and relationships
Emerging
markets as
laboratories
of innovation
Emerging markets
and the
economic crisis
Emerging markets as laboratories of innovation
• ‘Strategy is revolution; everything else is
tactics’” – Gary Hamel
• Challenging dominant logic: “New game, rules”
• Take any industry - three kinds of companies:
1. rule makers - incumbents that built the industry, e.g.
United Airlines or IBM
2. rule takers - companies that pay homage to the
industrial ‘lords’, e.g. US Airways or Olivetti
3. rule breakers - industry revolutionaries intent on
overturning order, e.g. Southwest or Dell
• For companies in categories 1,2; emerging
markets provide laboratory to move to 3
>69
Innovation in emerging markets
• One innovation strategy for emerging markets
focuses on the “Base of the Pyramid”
• To date, focus has been on upper and middleclass consumers in emerging markets
• BOP shifts emphasize to larger segment of
lower income consumers that have been
largely ignored
• Provides opportunity for integration of
economic strategy and dramatic growth
through product and process innovation
>70
The world pyramid
Purchasing Power
Parity in U.S. dollars
Population in millions
>$20,000
$2,000-20,000
<$2,000
>71
Tier 1
200-300
Tiers 2- 3
Tier 4
600-800
5500
Distribution of income and MNC strategy
Traditional and emerging focus for India
Traditional
MNC Business
Model
Some MNCs?
Future
Opportunity?
Local
Firms
10-20 million, Rich
PPP> $15,000, 70-100 m
PPP $ 5-15,000, 150m
PPP $2-15,000, 200m
PPP > $2000, 600m
Source: CK Prahalad
>72
Innovation via Base of the Pyramid (BOP)
• Pursuing the “base” forces rethinking of
conventional wisdom about:
• Technology and business models
• Scale and profitability
• Price-performance relationships
• Productivity and capital efficiency
• Sustainable development
>73
BOP: P&G
• Created Nutristar: children’s powdered
health drink
• initially failed in Philippines
• re-launched in Venezuela with help of NGOs, USAID,
• PuR: water filtration system for lowincome households marketed as single
serving sachets
• contain same ingredients as municipal water systems
• Each sachet is treats up to 10 liters of water
• One sachet added to a bucket of dirty water forces
all bacteria, viruses and pollutants to bottom
>74
BOP: P&G in China
• Former view: make best, then cut cost;
now “cheaper and better”
• Product adaptation (using local R&D)
for middle-low-income
• Basic toothpaste using salt as cleaning agent
• Expand sales of Tide beyond top 8% consumers by
creating simpler formulas - Tide Clean White – no
softener because unnecessary for hand washing
• Sell diapers to consumer who did not see need;
make attractive by getting more hours of absorbency
• Greater China revenues up from $1.1 billion in
2000 to $2.5 billion in 2007; 6% of total
>75
Tata’s Nano
• 2009: Tata unveils world's cheapest car 100,000 rupees (£1250)
• Vehicle aimed at Indian and other
developing countries where car ownership
is low; competes against bicycles and
motorcycles
• Engine 600-800cc mark; goal is to sell 1
million units within 5 years
>76
Tata’s Nano
• Ratan Tata told his designers that the
vehicle “must not be seen as strippeddown version of a normal car”
• To keep costs low, many parts made of
plastic and other composites
• Car to be sold in kit form, with final
assembly of the vehicles to be
completed in rural workshops in India
>77
Tata’s Nano
>78
GE in China
• GE launching $6 billion health-care initiative that
called "healthymagination
• Resetting GE's health-care business toward rural
and emerging markets and priorities of the
Obama Administration
• Develop and deploy low-cost equipment, such as
the portable ultrasounds already being used in
developing regions
• Focus on services that help hospitals become
more efficient and on health-care information
technology
>79
GE in China
• Bulk of new spending will be $3 billion R&D
development investment over the next six years into
affordable health-care equipment designed for
underserved populations in emerging markets
• 1/2 of unit's spending for products/services that
expand health care/reduce costs by 15%
• GE will launch 50+ basic products tailored to rural or
emerging markets, such as the lightweight portable
EKGs machines the company has developed for India.
• "You can deal with change, or you can get out in front
of it," says GE Healthcare CEO John Dineen
• GE Video
>80
Reflection Question
• What are the long-term prospects for MNEs from
developed countries wishing to succeed in
emerging markets? Which firms from which
industries will thrive and which will suffer?
• What are the long-term prospects for emerging
markets MNEs wishing to succeed in developed
country markets? Which firms from which
industries will thrive and which will suffer?
Outline of our Session
Key global trends
and the rise
of emerging
markets
Emerging markets
business systems
and relationships
Emerging
markets as
laboratories
of innovation
Emerging markets
and the
economic crisis