Tuesday, July 15, 2008

The Four-Tiered Structure of Markets in Emerging Economies

Emerging Giants.
By: Tarun Khanna, Krishna G. Palepu,
Harvard Business Review,
October 2006, Vol. 84, Issue 10

The Four-Tiered Structure of Markets

In developing countries, the markets for finished goods (products) and raw materials (factors of production) can be broken up into four distinct components.

Global tier

At the apex of the market pyramid is the global tier. In the product market, this section consists of consumers who want offerings to have the same attributes and quality that products in developed countries have and are willing to pay global prices for them. In the talent market, this tier consists of top-notch managers, such as newly minted graduates from the Indian Institutes of Management, who demand global-level salaries.

Glocal tier

Immediately below that is the glocal tier. In the product market, this tier consists of consumers who demand customized products of near-global standard and are willing to pay a shade less than global consumers do. An example would be Chinese and Indian executives who prefer to stay in a Shangri-La or Taj hotel rather than at a Four Seasons. In the talent market, this section consists of high-quality managers who will work only for local companies even if the pay is a little less than it would be at multinational corporations.

Local tier

Consumers in the local tier are happy with products of local quality and at local prices. In the talent market, managers in this section will put up with less-than-world-class working conditions as long as they are paid higher-than-average salaries.

Bottom tier

The bottom of the market consists of people who can afford only the least expensive products.

Multinational corporations typically compete for consumers and talent only in the global tier. Meanwhile, smart local companies, which dominate the local tier, move into the glocal tier and also create breakthrough products for the bottom segment as economies liberalize. These businesses often become emerging giants.

Tarun Khanna (tkhanna@hbs.edu)is the Jorge Paulo Lemann Professor at Harvard Business School in Boston. Krishna G. Palepu (kpalepu@hbs.edu)is the Ross Graham Walker Professor of Business Administration at Harvard Business School. They are coauthors of three previous HBR articles, including "Strategies That Fit Emerging Markets" (June 2005).

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