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.

Many corporations, however, are beginning to see that the opportunity big emerging markets represent will demand a new way of thinking. Success will require more than simply developing greater cultural sensitivity. The more we understand the nature of these markets, the more we believe that multinationals will have to rethink and reconfigure every element of their business models.

So while it is still common today to question how corporations like General Motors and McDonald’s will change life in the big emerging markets, Western executives would be smart to turn the question around. Success in the emerging markets will require innovation and resource shifts on such a scale that life within the multinationals themselves will inevitably be transformed. In short, as MNCs achieve success in those markets, they will also bring corporate imperialism to an end.

We would not like to give the impression that we think markets such as China, India, Brazil, and Indonesia will enjoy clear sailing. As Indonesia is showing, these markets face major obstacles to continued high growth; political disruptions, for example, can slow down and even reverse trends toward more open markets. But given the long-term growth prospects, MNCs will have to compete in those markets. Having studied in depth the evolution of India and China over the past 20 years, and having worked extensively with MNCs competing in these and other countries, we believe that there are five basic questions that MNCs must answer to compete in the big emerging markets:

• Who is the emerging middle-class market in these countries, and what kind of business model will effectively serve their needs?

• What are the key characteristics of the distribution networks in these markets, and how are the networks evolving?

• What mix of local and global leadership is required to foster business opportunities?

• Should the MNC adopt a consistent strategy for all its business units within one country?

• Will local partners accelerate the multinational’s ability to learn about the market?

What Is the Business Model for the Emerging Middle Class?

What is big and emerging in countries like China and India is a new consumer base consisting of hundreds of millions of people. Starved of choice for over 40 years, the rising middle class is hungry for consumer goods and a better quality of life and is ready to spend. The emerging markets have entered a new era of product availability and choice. In India alone, there are 50 brands of toothpaste available today and more than 250 brands of shoes.

Consumers are experimenting and changing their choice of products rapidly. Indians, for example, will buy any product once, and brand switching is common. One survey found that Indian consumers tried on average 6.2 brands of the same packaged goods product in one year, compared with 2.0 for American consumers. But does this growth of consumer demand add up to a wealth of opportunity for the MNCs?

The answer is yes…but. Consider the constitution of the middle class itself. When managers in the West hear about the emerging middle class of India or China, they tend to think in terms of the middle class in Europe or the United States. This is one sign of an imperialist mind-set—the assumption that everyone must be just like us. True, consumers in the emerging markets today are much more affluent than they were before their countries liberalized trade, but they are not affluent by Western standards. This is usually the first big miscalculation that MNCs make.

When these markets are analyzed, moreover, they turn out to have a structure very unlike those of the West. Income levels that characterize the Western middle class would represent a tiny upper class of consumers in any of the emerging markets. Today the active consumer market in the big emerging markets has a three-tiered pyramid structure. (See the exhibit “The Market Pyramid in China, India, and Brazil.”)

Consider India. There is a relatively small number of consumers who are responsive to international brands and have the income to afford them. Next comes tier two, a much larger group of people who are less attracted to international brands. Finally, at the bottom of the pyramid of consumers is tier three—a massive group that is loyal to local customs, habits, and often to local brands. Below that is another huge group made up of people who are unlikely to become active consumers anytime soon.

MNCs have tended to bring their existing products and marketing strategies to the emerging markets without properly accounting for these market pyramids. They end up, therefore, becoming high-end niche players. That’s what happened to Revlon, for example, when it introduced its Western beauty products to China in 1976 and to India in 1994. Only the top tier valued and could afford the cachet of Revlon’s brand. And consider Ford’s recent foray into India with its Escort, which Ford priced at more than $21,000. In India, anything over $20,000 falls into the luxury segment. The most popular car, the Maruti Suzuki, sells for $10,000 or less. Fiat learned to serve that tier of the market in Brazil, designing a new model called the Palio specifically for Brazilians. Fiat is now poised to transfer that success from Brazil to India.

While it is seductive for companies like Ford to think of big emerging markets as new outlets for old products, a mind-set focused on incremental volume misses the real opportunity. To date, MNCs like Ford and Revlon have either ignored tier two of the pyramid or conceded it to local competitors. But if Ford wants to be more than a small, high-end player, it will have to design a robust and roomy $9,000 car to compete with Fiat’s Palio or with a locally produced car.

Tailoring products to the big emerging markets is not a trivial task. Minor cultural adaptations or marginal cost reductions will not do the job. Instead, to overcome an implicit imperialism, companies must undergo a fundamental rethinking of every element of their business model.