The End of Corporate Imperialism

Too often, companies try to impose Western models of commerce on developing countries. They’d do better—and learn more—if they tailored their operations to the unique conditions of emerging markets.

by

C.K. Prahalad

and

Kenneth Lieberthal

by

C.K. Prahalad

and

Kenneth Lieberthal

From the Magazine (August 2003)

Summary.

Reprint: R0308G

As they search for growth, multinational corporations will have no choice but to compete in the big emerging markets of China, India, Indonesia, and Brazil. But while it is still common to question how such corporations will change life in those markets, Western executives would be smart to turn the question around and ask how multinationals themselves will be transformed by these markets. To be successful, MNCs will have to rethink every element of their business models, the authors assert in this seminal HBR article from 1998.

During the first wave of market entry in the 1980s, multinationals operated with what might be termed an imperialist mind-set, assuming that the emerging markets would merely be new markets for their old products. But this mind-set limited their success: What is truly big and emerging in countries like China and India is a new consumer base comprising hundreds of millions of people. To tap into this huge opportunity, MNCs need to ask themselves five basic questions: Who is in the emerging middle class in these countries? How do the distribution networks operate? What mix of local and global leadership do you need to foster business opportunities? Should you adopt a consistent strategy for all of your business units within one country? Should you take on local partners?

The transformation that multinational corporations must undergo is not cosmetic—simply developing greater sensitivity to local cultures will not do the trick, the authors say. To compete in the big emerging markets, multinationals must reconfigure their resources, rethink their cost structures, redesign their product development processes, and challenge their assumptions about who their top-level managers should be.

The Idea in Brief

Hundreds of millions of people in China, India, Indonesia, and Brazil are eager to enter the marketplace. Yet multinational companies (MNCs) typically pitch their products to emerging markets’ tiny segment of affluent buyers—who most resemble Westerners. Why? They think of developing countries simply as new places to sell their old products. Thanks to this imperialist mind-set, MNCs miss out on much larger markets further down the socioeconomic pyramid—which local rivals snap up.

How to seize this opportunity? Don’t assume you can export your current business model around the world. Coca-Cola initially lost market share to Pepsi in India by using its traditional advertising strategies instead of tailoring campaigns to local markets. Reconfigure your resources. Look to emerging markets for technical talent, as multinationals Philips and ABB have done in hiring more Asian employees while shrinking their European workforces. And reengineer cost structures to profitably serve less-affluent consumers. For example, Fiat designed a popular $9,000 car specifically for less affluent Brazilians.

By competing innovatively in developing countries, as companies such as Coca-Cola, Gillette, General Electric, and Boeing have done, you’ll unlock major new sources of revenue for your business.

The Idea in Practice

To compete innovatively in emerging markets, consider these questions:

How Can You Best Serve Developing Regions’ Emerging Middle Classes?

To win them, rethink:

Customer perceptions of value. Chinese, for example, have snapped up Philips Electronics’ video-CD player, deeming it a great two-for-one bargain—though there’s no Western market for the product.

Brand management. For example, Coca-Cola recaptured Indian market share from Pepsi by modifying its brand message. How? It used local heroes in its advertising.

Market-building costs. Changing regional habits is difficult and expensive. For example, instead of trying to convince Chinese consumers to use mobile phones, Motorola accommodated their preference for pagers by developing pagers that could display longer text messages.

Product design and packaging. Indians, for example, prefer single-serve packets (for products as varied as shampoo, pickles, and cough syrup) because they can buy only what they need, experiment, and conserve cash.

How Do Local Distribution Systems Work?

In China, distribution is regulated by local and provincial governments, and Chinese joint-venture partners protect their turf. But in India, individual entrepreneurs control a national distribution system through long-standing arrangements with small-scale distributors and banks. The lesson? Don’t assume you’ll have easy access to distribution—or that distribution works the same way abroad as it does at home.

Should You Use Expatriate or Local Leaders?

Expatriates from an MNC’s host country can transfer technology and ensure that local employees conform to the corporate culture. But many aren’t willing to stay long enough to fully understand local nuances and leverage their learning. Native-born leaders also offer advantages—such as appreciation of local nuances and deep commitment to native markets. But they may lack a sufficiently strong voice at corporate headquarters to convey their knowledge. Blend expatriate and local leadership to capture global knowledge while honoring local sensitivities.

Should Your Overseas Business Units Act Uniformly or Independently?

There’s no one right answer. In markets with massive governmental interference (think China), coordinate business units so they comply with government priorities (such as local sourcing agreements), even though this is taxing and time consuming. In markets with less-restrictive governments, business units may operate more autonomously.

What Role Should Local Partners Play?

Joint ventures pose problems if parties have different expectations about what each will provide, who controls what, and how soon the profits will roll in. Local partners often lack adequate market knowledge or use archaic business practices. If so, limit reliance on local partners—or use them as figureheads who can provide a local face.

As they search for growth, multinational corporations will have to compete in the big emerging markets of China, India, Indonesia, and Brazil. The operative word is “emerging.” A vast consumer base of hundreds of millions of people is developing rapidly. Despite the uncertainty and the difficulty of doing business in markets that remain opaque to outsiders, Western MNCs will have no choice but to enter them. (See the table “Market Size: Emerging Markets Versus the United States.”) During the first wave of market entry in the 1980s, MNCs operated with what might be termed an imperialist mind-set. They assumed that the big emerging markets were new markets for their old products. They foresaw a bonanza in incremental sales for their existing products or the chance to squeeze profits out of their sunset technologies. Further, the corporate center was seen as the sole locus of product and process innovation. Many multinationals did not consciously look at emerging markets as sources of technical and managerial talent for their global operations. As a result of this imperialist mind-set, multinationals have achieved only limited success in those markets.

A version of this article appeared in the August 2003 issue of Harvard Business Review.

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C.K. Prahalad was the Paul and Ruth McCracken Distinguished University Professor of Strategy at the University of Michigan’s Ross School of Business. He wrote 16 articles for HBR before he passed away, on April 16, 2010.
KL

Kenneth Lieberthal (kliebert@bus.umich.edu) is the William Davidson Professor of Corporate Strategy and International Business, the China director of the Davidson Institute, and the Arthur Thurnau Professor of Political Science at the University of Michigan in Ann Arbor. He is also a senior director of Stonebridge International, a Washington, D.C.–based consulting firm, and the coauthor, with Geoffrey Lieberthal, of “The Great Transition” (HBR October 2003).